The 3 Market Predictions You'll Hear For 2016

Everyone's going to say it's a stock picker's market

by Adam Warner

Published on Dec 29, 2015 at 8:30 AM

It's time for one of my favorite year-end traditions that doesn't involve football games. Yes, it's the Year-End Prediction Game. So put your seatbelts on. Time to get some value add with your champagne!

1. 2016 will be a stock picker's market

Okay, not to be confused with 2015, which was a stock picker's market, in that if you didn't pick Amazon.com, Inc. (NASDAQ:AMZN) or Facebook Inc (NASDAQ:FB) or a couple others, you had an uphill climb trying to beat the market.

Of course, it's always a stock picker's market! No one's going to go on TV and tell you that indexing will probably outperform stock picking for most. And no one's predicting that using a dartboard will outperform stock picking going forward. But indexing does make more sense for most. Dartboards probably not so much.

But we can actually quantify how stock picking might do in the options world. Here's a look at implied correlation in the S&P 500 Index (SPX) via the CBOE S&P 500 Implied Correlation Index (ICJ).

151229Warner

It's far from a perfect gauge, but it does suggest that correlation assumptions are declining. And that means, yes, investors are pricing in more dispersion ... and stock picking might work!

2. Volatility will rise in 2016!

We discussed this the other day. Yes, it's a broken clock prediction, but ... yes, volatility will probably trend up in 2016. CBOE Volatility Index (VIX) futures certainly expect a modestly higher VIX going forward.


151228Warner2

Of course, they’re a bit of a broken clock too, as they always "predict" higher vol going forward. 

3. Expect 8-10% gains next year

So, I read this headline and I’m thinking it sounds like doom and gloom, which would be shocking to see on MarketWatch:

151229Warner33

But alas, I misread it as a prediction that the market would do worse in 2016 than 2015, which according to my math means we’re down next year. It actually is something quite different:

"Optimism in the stock market took a hit in 2015. The average year-end 2016 target for the S&P 500 for the 10 strategists surveyed by MarketWatch is actually lower than the average of their original 2015 targets. At this time last year, the strategists had pegged the S&P 500 ending 2015 at an average of 2,201. For the end of 2016, those same analysts have an average target of 2,193."

So 10 strategists guessed SPX would be 2,201 at the end of 2015; now those same 10 strategists predict SPX will be 2,193 at the end of 2016. Now that’s … not really cosmic. I mean, that’s a rounding error on something 12 months away.

The consensus is close to 6% gains, a bit lower than the standard 8-10% predictions we hear every year. That’s a slightly bearish call, so it's a (tiny) anecdotal contra tell.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research


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