Tahoe Market Pulse: Goldman predicts a flat market
December 2, 2015
We are in a bull market, which is why stocks were not de-railed by the tragedy in Paris and killings in Beirut, Mali, Tunisia, Cameroon and Nigeria and the downing of a Russian civilian plane.
In fact, we are in the most bullish time of the year. With rare exceptions (only twice in the last 29 years), stocks have posted good gains from the Friday before Thanksgiving through January 3.
Beyond January 3 investors will focus on the economic and profit outlook and to a much lesser degree on interest rates. It is hard to be confident about economic growth when prices for all but a handful of commodities are falling.
Most, including metals and industrial items, are closely tied to the global economy so their weakness doesn't bode well. Others agree. Goldman Sachs expects the S&P 500 at year-end 2016 to be 2100, where it is now. Their reasons:
GDP growth will be 2.2 percent next year and in 2017, so the pie will barely be growing. S&P profits will rebound 10 percent in 2016, but only due to rising earnings in the energy patch (compared to this year's dismal results).
Interest rates will rise beginning next month and rise a little faster than investors currently expect. For those reasons and others, Goldman sees the S&P's price-earnings multiple falling slightly to 16, historically average. Goldman's outlook for GDP growth logically leads to their conclusion about the S&P.
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After all, how can earnings grow much if at all without revenue (read GDP) growth? Left unsaid is that investors will have no attractive alternative to better-yielding stocks, and that alone could give the S&P a boost beyond 2100 while it prevents any significant sell-off.
In such an environment, investment-grade preferreds yielding 5.5 to 6.5 percent would have superior returns. Better-yielding stocks will top others.
GDP growth of 2 percent is not acceptable. At that pace, incomes will stagnate, employment gains will be meager and standards of living will not rise. Those saving for retirement will need to adjust their plans, maybe work years longer.
Rising health care costs will complicate matters further. A growth rate faster than 3 percent would solve a lot of problems and boost wages, stock prices and employment, but wishing alone won't make it so. The Fed has done its part. Now Congress needs to be part of the solution.
David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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