- Strategists who got it right are cautious on U.S. stocks, gold
- Treasuries seen resilient in 2016 as Fed tightens gradually
The most accurate forecasters of stocks, bonds and precious metals have a warning for investors as they look forward to 2016: don’t trust the wisdom of crowds.
After a year when consensus estimates for U.S. equities, Treasuries and gold all proved wrong, the few strategists who got it right in 2015 are breaking away from the pack once again. If their predictions for next year are on target, investors can expect 12 more months of resilience in U.S. government bond markets, disappointing returns from the Standard & Poor’s 500 Index and a fresh six-year low for gold.
The majority of forecasters began this year looking for a stronger global economy to boost stocks and drag bond prices lower. Instead, Wall Street’s contrarians came to the fore amid market turmoil in China and a delayed interest-rate increase by the U.S. Federal Reserve. While that buoyed demand for Treasuries, it sent commodities prices to a 16-year low and left global equities on pace for their first annual decline since 2011.
“Repeatedly, the market expectation hasn’t transpired,” said Yusuke Ito, a senior investor at Mizuho Asset Management in Tokyo, which oversees about $41 billion. “Stocks have already started to decline, and this downward pressure will continue in 2016. For bonds, I don’t think the Fed can hike rates many times. That will bring downward pressure on yields as well.”
Professional forecasters of U.S. stocks began the year as bulls, with the average S&P 500 estimate tracked by Bloomberg calling for an 8.1 percent advance. The gauge is instead on course for a 1.8 percent decline, weighed down by shrinking profits and concern that an end to the Fed’s zero interest-rate policy will put a cap on valuations. Those same headwinds have helped saddle a majority of global equity markets with losses, sending the MSCI All-Country World Index to a 5.4 percent retreat. Emerging markets bore the brunt of the losses, with the benchmark gauge losing 17 percent.
Goldman Sachs Group Inc.’s David Kostin has made some of the most accurate calls on the U.S. market this year, with a first-half target for the S&P 500 that came within 1 percent of its peak in May and a revised year-end forecast that’s about 1 percent below Monday’s close of 2,021.15. The New York-based strategist says gains next year will be capped at 2,100, leaving him tied as the most pessimistic forecaster for the second straight year. The average projection is 2,216.
Like this year, Kostin’s call for 2016 hinges in large part on his view that valuations have hit a ceiling. The S&P 500 trades at about 17 times projected earnings over the next 12 months, versus the average multiple of 14 over the past decade, according to data compiled by Bloomberg.
In the bond market, most forecasters at this time last year were anticipating a faster pace of Fed tightening to send Treasury yields higher, with the average estimate for 10-year rates coming in at 3.08 percent. Yields have stayed low -- at 2.2 percent on Tuesday -- as tepid U.S. inflation and signs of economic stress in emerging markets kept the Fed on hold until December.
Janney Montgomery Scott LLC’s Guy LeBas, the most-accurate forecaster of the Treasuries market this year, says 10-year rates will end next year almost exactly where they are now, at 2.22 percent. His outlook for low inflation and weak economic growth puts him at odds with the median estimate in a Bloomberg survey, which sees 10-year yields rising to 2.75 percent.
“The call for materially higher interest rates was inconsistent with the facts on the ground,” said LeBas, the chief fixed-income strategist at Janney Montgomery in Philadelphia, who expects the Fed to lift its benchmark rate twice next year.
As for the rest of the global bond market, Mitsubishi UFJ Kokusai Asset Management’s Hideo Shimomura says investors should position for a narrow trading range in the sovereign debt of Japan and Germany as bond purchases by the European Central Bank and Bank of Japan keep yields near record lows.
Shimomura, whose bullish calls on government notes in 2015 proved prescient, is also bullish on bonds in Australia as low inflation gives the central bank room to cut interest rates. He’s avoiding the high-yield corporate debt market, which is heading for its first annual decline since 2008 amid a collapse in earnings at raw-materials producers and a flood of investor redemptions from junk bond funds.
“The high-yield sector is quite dangerous,” said Shimomura, the chief fund manager at Mitsubishi UFJ Kokusai, which has $98.8 billion in assets.
This year’s rout in commodities surprised all but the most bearish of forecasters as tepid global inflation dimmed the allure of precious metals, weak Chinese demand hurt raw-materials prices and a global supply glut sent crude oil tumbling. The Bloomberg Commodity Index sank 26 percent, on course for its worst year since the global financial crisis in 2008.
Spot gold prices, down 9 percent this year, will probably drop a further 12 percent to $950 an ounce by the end of 2016 as rising U.S. interest rates reduce the metal’s appeal as an alternative investment, according to Oversea-Chinese Banking Corp.’s Barnabas Gan, the most-accurate precious metals forecaster tracked by Bloomberg in the past three quarters. That compares with the median estimate of $1,100.
In the $5.3-trillion-a-day currency market, many consensus trades panned out this year because analysts correctly forecast the dollar’s 2015 ascent. The U.S. currency, as measured by the Bloomberg Dollar Spot Index, has gained 8.8 percent as traders positioned for a policy divergence between the Fed and its central-bank counterparts in Europe and Japan. Enrique Diaz-Alvarez of Ebury Partners Ltd., one of the few forecasters to predict that the dollar’s rally would take it beyond $1.10 per euro, now says the currency will reach 95 cents by 2017. It traded at $1.0918 on Tuesday.
One of this year’s biggest currency surprises came from China, where the yuan weakened 4.2 percent against the dollar after Chinese authorities devalued the currency in August and shifted to a more market-oriented exchange rate as part of a successful bid for inclusion in the IMF’s basket of reserve currencies.
Michael Every, the most bearish yuan forecaster tracked by Bloomberg at the end of 2014, sees another 16 percent drop next year to about 7.7 per greenback as the biggest emerging economy slows and authorities guide the yuan using a basket of currencies rather than just the dollar. His forecast compares with the median estimate of 6.6.
“They want a stable currency, but not just against the dollar,” said Every, the head of financial-markets research at Rabobank Group in Hong Kong. “The yuan is too expensive.”