Readers' Market Predictions Go to Extremes

Morningstar readers aren't expecting a whole lot from the stock and bond markets in 2016, judging from their annual "crystal ball" predictions for the year ahead.

Their return forecasts for the S&P 500's annual return in 2016 averaged out to 2.8% as of the morning of Jan. 15, 2016. Despite that mild overall number, posters' guesses for equities tended to run to the extremes, from the extremely pessimistic (a 20% loss for the S&P) to more cheerful (a 17% return).

Return expectations were, not surprisingly, more tightly bunched in the fixed-income space. The average guess was a 2.8% gain for the Barclays U.S. Aggregate Bond Index, with every forecast landing between 1% and 3%.

Interestingly, the 2016 predictions were well below the stock- and bond-market forecasts that readers made for 2015 at the beginning of last year. While many posters in the 2015 crystal-ball game refrained from providing concrete return expectations--and, therefore, our sample size was small--those who did make a specific forecast predicted a 7.6% return for the S&P 500 as well as a 5.5% gain for the Aggregate Index. Both indexes fell well short of those guesses for the year, ending only modestly in the black. Given last year's lackluster market performance, as well as a terrible start to 2016, it's probably not surprising that our armchair pundits' forecasts were more conservative for 2016.

Of course, short-term forecasts, whether from Morningstar.com's well-informed user base or from professional investors, are notoriously difficult to make. Many readers took pains to note that their forecasts were their best guesses, nothing more. (Jimoak quipped, "I can't predict the time of day while I'm looking at a clock.") Thus, readers should take them with a grain of salt when managing their own portfolios.

That said, several posters offered interesting perspectives on what they think will happen during the next 11 1/2 months. To read the complete thread or share your own prediction, click here. (Note that all of the predictions cited below were made before the market experienced a major downdraft on Friday, Jan. 15.)

'I Predict Pain' There were few sunny outlooks for stocks; most posters believe that the extreme volatility that has marked the first few weeks of 2016 will be with us for a while.

BEmanuel was among the most pessimistic of forecasters, writing, "My prediction is that, following the trend, we will see some more downside momentum followed by panic in stocks. Maybe another 25-30% down before recovery."

Lucky 7 said simply, "I predict pain."

Bitsotree wrote, "I think 2016 is the year that [perennially bearish forecaster] John Hussman will be correct."

Rforno is expecting a really wild ride for the equity market in 2016, writing, "I think with quantitative easing long gone ... the markets figuring out the New Normal without Fed assistance, [and] global stability concerns, equities will chop around and likely move lower, perhaps significantly so ... maybe down 10-15% with potentially a short drop through 'support' to down 20-25% before a tape-painting or panic-buying bounce heading into year-end to move it back up to unchanged (or very close to it)."

Capecod was one of a handful of posters calling for a meaningful loss for the S&P 500--8.5% for the year; he expects the index to be dragged down because corporate earnings have already peaked and anticipates that GDP growth will weaken.

'Mr. Market Will Do What He Usually Does' But the thread wasn't all gloom and doom. Several posters noted that the recent volatility could presage smoother sailing ahead.

Stillers believes that, based on his read of the market's historical performance patterns, equities' poor showing in 2015 could mean better results this year. "I'll suggest a 2016 S&P total return in excess of 10%," he wrote.

Rathgar also believes that fearful investors could get burned by getting too defensive. He's forecasting an 8% return for the S&P, writing, "In 2016, everyone is depressed about the markets and some are moving to cash. Mr. Market will do what he usually does and take advantage of investors."

DrVenture thinks the fundamentals are good for a decent year in the equity and bond markets. "The consumer seems to be doing OK, there are signs of wage growth, and unemployment is seemingly low. Equity valuations do not seem too lofty. All the turmoil we are presently seeing may give the Fed pause and limit further rate hikes. I even expect the Saudis to capitulate somewhat on this production war. Housing seems to be recovering and people love to spend money. So, I am expecting an above-average year for both stocks and bonds."

'Returns Abroad Will Likely Improve' Several respondents said that they expect foreign stocks to perform better than U.S.

Dziuniek was one such investor, anticipating a flat return for the S&P 500 but a 5% return for international equities. Meddguy also thinks selective investors could be rewarded for venturing overseas. His forecast calls for a 4% to 5% U.S. equity return and 7% to 8% returns from European equities. (He thinks emerging markets will end the year in the red, however.)

Winn1177 is of a similar mind. While his forecast for the S&P 500 is 3.5%, he sees returns in the neighborhood of 5% to 8% for international equities. (Note that many of the long-term forecasts from market experts, which I cited in a recent article, called for better performance from foreign stocks than U.S.)

Hdw4567 believes that mean reversion should lead international equities to outperform U.S., writing, "Looking back over the last five to 10 years, foreign developed-markets stocks have significantly lagged U.S. stock returns. If you believe in reversion to the mean and in lower valuations, odds are--whether it's this year or in the next few years--the returns abroad will most likely improve."

'The Fed Doesn't Manage Four Rate Rises' Capecod predicts Aggregate Index returns of 1.8% for the year, slightly below the average return expectation of 2%. While he expects that inflation worries could send yields up briefly, he believes that weakening GDP growth and modest inflation will drive them back down.

Audreyh1 believes that worries over more Fed rate hikes could be overblown. Among her predictions: "The Fed doesn't manage four rate rises in 2016 due to market turmoil and global economy concerns. Its impact on intermediate- and long-term rates is minimal." LarBar928 is on the same page.

Win1177 agrees the Fed isn't likely to act aggressively. "The Fed will only hike rates two times total," this poster wrote, "all 0.25% increases."

AndrewXnn believes that inflation could drive yields up and crimp Treasury prices. But even in that scenario, investors in lower-quality bonds should do all right. "For bonds, I suspect that modest growth will continue and that inflation will begin to return. In turn, interest rates will rise modestly. Ten-year Treasuries will have a negative return. However, high-yield bonds should do fairly well," he wrote.