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Eight Market Predictions for 2016 | AIER

I actually think that these are pretty accurate predictions.


Eight Market Predictions for 2016

by Luke F. Delorme, Research Fellow

Wednesday, January 6, 2016

1. Stocks will go up, stocks will go down.You know this, but it is worth repeating for the sake of your sanity. Markets go up and down daily. For every buyer, there is a seller. But there is a broader historical point here. Even during periods of relative growth, there are negative stretches. Likewise, during downturns there are upswings. Since 1990, there has never been a calendar year during which all 12 months were all up or all down for the S&P 500. 2013 was a great year for stocks and still saw two down months. 2008 was a terrible year and still saw four up months. Historically, stock markets tend to trend upward, but we should certainly expect that markets will go up AND down.

2. An investment advisor or financial planner will try to sell you something with the term “downside protection” immediately after a short-term drop in markets.Going back to my first point, at some point during the year it is likely that markets will fall. It is precisely this time that we’ll see articles about pension funds considering more hedge fund exposure. We’ll start hearing our friends talking about “downside risk” and hedging against market losses. Naturally, these conversations crop up AFTER the market has dropped. Do yourself a favor and allocate to a portfolio that is comfortable BEFORE the market drops. This could mean significant “downside protection” (e.g., a position in cash, bonds, Treasuries, TIPS), or it could mean minimal downside protection if you are insensitive to short-term performance.

3. People will predict rising interest rates. It’ll happen someday!For four straight years, we’ve heard that interest rates have “nowhere to go but up.” And yet, they were stable in 2012, up slightly in 2013, down in 2014, and flat again in 2015 (despite the Fed raising rates). On Christmas Eve 2014, the 10-year yield was 2.26 percent. This year, it was 2.24 percent. So much for a guarantee of rate increases. The funny thing is that now people are starting to say that they don’t expect increases in interest rates this year…A few years of bad predictions makes you start to question your assumptions. So maybe this will be the year that rates really start to rise.Theoretically, there is a lower bound of zero percent on interest rates, even though Europe has negative interest rates. This lower bound and predicted Fed rate hikes are the reasons that economists and prognosticators keep saying that rates have nowhere to go but up, but they’ve been wrong for four years in a row. Every reasonable prediction is right so long as you don’t provide a time frame.Whether or not interest rates rise, the purpose of bonds in your portfolio is usually to provide stability in the event of stock market turbulence. A small expected decrease in the value of your bonds is the price you pay for protection against large swings in overall volatility.

Read the complete article here:  Eight Market Predictions for 2016 | AIER

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