· Holiday shopping results. Holiday shopping totals are not yet final but the numbers so far are quite good. According to MasterCard’s Spending Pulse, retail sales during the holiday season rose 7.9% year over year excluding autos and gasoline sales. E-commerce drove the strength with a reported 20% gain. The most complete picture of holiday shopping will come from the government’s official statistics for December (due out January 15, 2016), while results from the retailers themselves, mostly out in February, including gift card sales, will go further in determining how the stocks perform.
· More Fed watching. Just when you thought it was safe to turn attention away from the Fed after the December 2015 rate hike, Fed speculation will ramp up again over the next couple of weeks with another Federal Open Market Committee (FOMC) meeting on tap for the last week of January 2016. One of the biggest stories of 2016 will be how the gap between what the Fed projects for the federal funds rate (four hikes of 0.25% each) and what the market expects (about half that) is resolved. After the January 2015 meeting, the FOMC meets again on March 15–16, 2016, and will update its economic forecasts. Our view is that the Fed hikes rates by 0.75% during the year.
· And more oil watching. No specific energy event is on the first quarter 2016 calendar besides regular inventory, production, and rig count data (which certainly matter). The timing of geopolitically driven spikes in oil prices is unpredictable. But we put energy on this list because it is one of the biggest keys for markets in 2016 and will be watched every day. Beyond the impact on the energy sector, oil impacts capital spending (discussed in today’s Weekly Economic Commentary), the industrials sector, overall S&P 500 profits, emerging markets, and the high-yield bond market. The next regularly scheduled Organization of Petroleum Exporting Countries (OPEC) meeting is not until June 2, 2016.
· Political calendar. The presidential election year has historically not been beneficial for stocks until a likely winner emerges during the fourth quarter and removes the uncertainty. But when the Republican candidate emerges (with Hillary Clinton the presumptive Democratic nominee)—a process that will begin to take shape in Iowa and New Hampshire in February—the most politically sensitive stocks (healthcare, energy, and financial services) may move based on the candidates’ policies. The fact that 2016 is an election year does not mean much for stocks based on history (average S&P 500 gain in an election year at 7% is near the average for all years since World War II).
Reaffirming 2016 Forecast
We continue to expect mid-single-digit returns for the S&P 500 in 2016, consistent with historical mid-to-late economic cycle performance, driven by mid- to high-single-digit earnings and a largely stable price-to-earnings ratio.
With the S&P 500 ending 2015 at 2043, this forecast would put the index at around 2100 at the end of 2016 based on a 3% price gain and 2% dividend yield. Although this level represents a positive year for stocks and could potentially outgain the high-quality bond market, this forecast is among the more moderate on Wall Street. We expect these near historical routine returns as earnings start to normalize and oil markets find their equilibrium. But as we are still in the second half of the economic cycle, we will actively monitor pockets of volatility and potential signs of an economic downturn.
Conclusion
It was a lackluster 2015 for a stock market that faced many challenges. As we turn the page to 2016 we look forward to a better year for stocks. Early in 2016 we will be closely watching holiday shopping figures, earnings season, the Fed, oil, and the political calendar, to determine the market’s near-term direction.
Burt White is chief investment officer for LPL Financial.