With market volatility recently reaching its highest level since the financial crisis, investors are understandably questioning what the outlook is for U.S. stocks in 2015 and beyond.
While I don’t believe the recent volatility represents the start of a new bear market—I expect the U.S. market should finish the year higher than where it’s at now—today’s valuations suggest U.S. returns may be below average over the longer term.
First the good news. Despite growing fears of a recession, the U.S. economy is sound, even if growth for the year is likely to once again disappoint. Recent economic data point to some growth firming, inflation remains hard to find and long-term rates are up by barely 10 basis points (bps) from where they started the year, according to data accessible via Bloomberg. Meanwhile, the Federal Reserve (Fed) is highly unlikely to raise rates more than once in 2015, and will probably adopt a similarly languid pace to tightening in 2016. All of this suggests that, absent more scares from China, the U.S. market probably will finish 2015 with a nominally positive return for the year.
What’s to come after 2015?
Looking ahead to 2016, the big risk to U.S. stocks remains an emerging market-induced global recession. Emerging markets account for a growing percentage of global growth, and the recent slowdown in the emerging world isn’t limited to China, as data from Bloomberg demonstrate. Economies in Brazil and Russia are contracting, and most large emerging markets, with the possible exception of India, are slowing, according to the data. But while 2016 is likely to be another year of slow global growth, I don’t foresee a global recession. While China remains a genuine threat, the government has additional monetary and fiscal tools to manage its slowdown. As such, I also don’t see a bear market starting during the first half of 2016.