· Fourth quarter 2015 earnings season has disappointed. Although we continue to expect earnings growth to increase over the course of 2016, the trajectory of that ramp has flattened out after the latest batch of disappointing results. Fourth quarter S&P 500 earnings are tracking below prior estimates, unusual at this stage of earnings season, and 2016 estimates have already been revised lower by more than 2% (to a 4–5% increase).

Also pointing to a better February is that the month has been higher each of the past six years, the only month to do so.  Although February is one of only three months with a negative long-term average return, this month has seen some very positive seasonality recently. Additionally, the S&P 500, which fell in November and December 2015, has not fallen for three straight months since 2011. Finally, in 2010, 2014, and 2015, the S&P 500 dropped at least 3% in January, but saw February bounce back by 3%, 4%, and 5%, respectively.

Putting all of this together, we still believe stocks may produce modest gains in 2016, but in the short term, we see risks as balanced between upside and downside, which suggests some caution is warranted.

CONCLUSION

The January Barometer says that prospects for gains in the stock market are less likely for the final months of the year when stocks finish lower for the month of January. However, this indicator has not worked well in recent years, when down Januaries have led to strong Februaries, and annual returns have mostly been positive outside of recession. We still see opportunities in the stock market in 2016, but suggest caution in the near term as we await clarity on the key factors pressuring investor sentiment, including the Fed, China, and oil.
 

Burt White is chief investment officer at LPL Financial.
 
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