As we turn the page on 2016 and begin the New Year, I wanted to take a look back at My Gut Feeling For 2016. Recall these predictions were made in the spirit of the old Wall Street Week with Louis Rukeyser show in that they were fixed a year ago, and could not change. A table of the performance of major stock market indexes, bond yields and commodity prices is presented below. The original commentary is in lighter print and in bold italics are the comparison to actual results and explanation, as warranted.
- The SPX ended 2015 at 2,043.93, which using Bloomberg’s Standard & Poor’s 500 earnings estimates of about 111.97, implies an index price/earnings multiple (PE) of 18.25. Standard & Poor’s own analysts estimate that SPX earnings for last year should come in at 106.33 implying a year-end index PE of 19.22. Bottom up estimates for 2016 earnings as complied by Standard & Poor’s for its SPX index are expected to increase by about 18.35% to just 125.84. Bloomberg’s estimates call for SPX EPS of 125.59. Both of those estimates seems outrageously high to me. In 2016, my expectations are for 3% nominal earnings growth with another 2% of anti-dilutive earnings growth due to buybacks. On top of that, I expect the rise in the US Dollar to reverse and add back 2% of earnings. Hence, my SPX earnings estimate using a base of 112 for 2015, will rise to 120 in 2016. Applying an earnings multiple of 18.5 in 2015, I am setting a year-end target for the S&P 500 at 2,222, about an 8.7% year-over-year increase – The SPX will earn approximately 120 in 2016 on an adjusted basis, based on current expectations. I was more aggressive than many analysts with my SPX target for 2016. Even with that in mind, I consider this forecast to be correct as the index closed the year at 2,238.83 versus my target of 2,222.
- The Federal Reserve Open Market Committee (FOMC) finally raised rates off of zero percent in December of last year. Many economists and pundits believe that the FOMC will raise rates another four times next year to 1.25% by the end of the year. I could not disagree more. The FOMC will raise rates once and perhaps at most twice by 25 basis points next year. There are several reasons for this. First, the economy will remain in slow growth mode and inflation will remain muted. Second, the US Dollar is too strong and further tightening will only exacerbate the impact on foreign currencies. Actually, the FOMC needs to engineer a dollar weakening. Third, this is an election year and as much as the FOMC might not admit it, there is a political aspect to monetary policy. – For the second straight year the FOMC played according to my script and raised the Fed Funds rate to 0.25% in its last meeting of the year in December. 2017 will not be as easy to predict but I will give it my best with my guidance for 2017 next week.
- The thirty-five year bull market in bonds appears to have begun its demise. Yields backed up last year such that in the US Treasury market, yields were priced as follows at the end of the year: 5-year 1.76%; 10-year 2.27%; and, 30-year 3.02%. By the end of 2016, I expect those yields to be as follows: 5-year 2.00 %; 10-year 2.70%; and, 30-year 3.50%. – It appears that the two-generation long bond bull market has met its demise. As far as yields on US Treasuries I was in the right neighborhood but at the wrong address as at the end of the year yields were as follows: 5-year 1.93%; 10-year 2.44%; and, 30-year 3.07%. The yield curve flattened a bit but not significantly enough to warrant concern for the economy.
- Unlike the past two years, I am not expecting another brutal winter in 2016. However, due to sluggish economies in Asia and Europe, low levels of GDP growth in the US will continue to befuddle economists, monetary authorities, investors and the media. The US Dollar will weaken a bit giving up some recent gains. I expect GDP in the US to grow by: 2.0% in 1q; 2.2% in 2q; 2.2% in 3q; and 2.3% in 4q. – Sluggish economic growth continued in the US as it did throughout the rest of the world. In the US GDP grew by: 1.1% in 1q; 1.4% in 2q; 3.5% in 3q. This averaged 2.0% per quarter, so I might have been a little too optimistic but once you factor in 4q16 GDP, I will likely be close.
- Energy prices will remain at low levels given slowing global demand and increasing global supply. Tensions in the Middle East will keep the spigots flowing in Saudi Arabia and Iran. Crude oil prices will decline from 2015 closing levels of $37.04 but will not remain there all year. A bounce back into the $40s will occur but most of the year crude oil will remain range bound from the mid $30s to the mid $40s. However, as the dramatic decline in 2015 from 2014 had a significant impact upon the stock market, the change from 2015 to 2016 will have insignificant effect and given cost cutting measures; as capital expenditures are cut; will result in earnings increases for the major exploration and development companies. – I was spot on with this prediction.
- Terrorism will not go away and will continue to cause market volatility. The most likely target will be at this year’s summer Olympics in Rio de Janeiro in Brazil which will take place August 5 to August 21. A major ISIS cell in the USA will be infiltrated and closed down. As a result, Congress enacts several of Donald Trump’s suggestions to maintain tighter border control.- Terrorism certainly continued to plague the world. Fortunately Rio was spared but France suffered the second horrific terrorist attack in two years, this time on Bastille Day in Nice. Can you say “build that wall?”
- Chipotle Mexican Grill (CMG) suffered a series of unrelated E Coli and other disease outbreaks in 2015. A full investigation into these seemingly unrelated events will conclude that they were indeed related. A group of individuals will be arrested for sabotaging the company’s restaurants. The source may be disgruntled employees, an act of a depraved group of people or terrorism. After that time, CMG will rebound, but not to levels we have seen in the past. – Chipotle Mexican Grill (CMG) did not experience any more foodborne related problems in 2016. As far as the incidents in 2015, there was no single source or sabotage involved, to which we now know. The stock did rebound in early 2016 but remains under pressure as the company has lost customer loyalty to other brands such as Jack-in-the-Box’s (JACK) Qdoba.
- A major disruption will take place in the automobile market and it’s not Uber. Apple (AAPL), Google (GOOGL) and Tesla (TSLA) have been all working on new automotive technologies. These companies realize that owning the technology and patents behind automobiles and not the manufacturing ability or capacity is where the future will be. As a result, these companies, using their tremendous capital wealth, will be on the hunt for acquisitions to control the parts market. Possible targets for their acquisitions will be Magna International (MGA), Johnson Controls (JCI) and Lear (LEA). The domestic automotive manufacturers as we now know them, General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) will become contract manufacturers in the future, just as Foxconn is for electronics. – I was wrong on this prediction, at least for 2016. In the fullness of time, some of the aforementioned will come true.
- Household formation (as an annual change) peaked in October 2004 at 2.37 million then fell to a low of negative 247 thousand in December of 2008. From that point of time through November 2014, household formation fluctuated between just over zero to one million. It then rose to 2.21 million in December 2014, only to decline since then. I expect that decline to reverse and the 2004 high will be eclipsed in 2015. According to the US Census Bureau, the median age of first marriage rose to an all-time high in 2015 compared to data going back to 1890. It now seems to be on the decline. I expect this decline to continue. Despite rising interest rates and student debt, people are taking the walk down the aisle and starting up new families. This will give the housing market a second wind. US New home sales which have languished in a range of about 300,000 to 500,000 since the housing market bust began in 2008 will have a resurgence to normalized pre-housing boom levels of 500,000 to 700,000 units. – US New Home Sales rose steadily throughout 2016, in a range of 502,000 to 659,000, peaking at 622,000 units in the third quarter. I will put this one in the win column.
- Finally, there is the 2016 Presidential Election here in the United States of America. The likely winner will be Hillary Clinton. However, that is not certain and it won’t be a cake walk for her, despite what the liberal media may think. Her likely opponent will be Donald Trump or Ted Cruz, or a ticket of the both of them. Clinton will not have the same type of support that Obama had in both of his election victories. In 2012 Obama received 332 electoral votes while Romney received 206. 270 are needed for victory. Obama barely carried Florida, Virginia and Ohio in 2012. The Roosevelt Jewish voters are dying out and Trump’s daughter, who is an observant Jew, will help deliver the Jewish vote in Florida. Although, Debbie Wasserman Schultz is doing a good job herself of chasing Floridians away from the Democratic Party. Nevada and Ohio, the latter thanks to Gov. Kasich will also swing back to the GOP. That puts the GOP count at 259. Clinton will therefore have to keep Virginia, Pennsylvania and Wisconsin to win the election. That is not a done deal. As an aside, if it is Clinton vs. Trump then, it will be the first election, in modern history, or if ever, when both leading candidates did not carry their home states – Arkansas and New York. – Well what more can I say? I was correct about Clinton versus Trump. Also, I laid out what Donald Trump needed to do to secure the Presidency of the United States and he achieved those goals. In fact, a client reminded me that I predicted, while we were driving to dinner in Saratoga Springs, NY, several years ago, before he even announced his candidacy, that Donald Trump would be the next President of the United States.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, F, GOOGL, GM & JACK — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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