The stock market in 2015 proved a bumpy ride and difficult to predict, yet participants in this year’s Star Tribune Investors’ Roundtable retained their optimism that the markets will still see measured growth in 2016.

When the group convened last year, all nine participants estimated the S&P 500 would close higher than it did, calling for a consensus 7.4 percent increase, with individual predictions from 2,100 to 2,350. The index closed Wednesday at 2,063, a slight increase for the year.

As one of this year’s participants said, investors forgive optimism in predictions more than a pessimistic outlook that would keep them away from a good deal.

Despite the overshot on S&P 500 calls, general sentiments from last year’s roundtable were prescient. Most favored investing domestically, and while the U.S. market ended up being flat, it was still better than some foreign markets.

Some predicted oil could continue to go lower, and as it did it continued to hurt the energy sector, which was off 25.5 percent. They said the U.S. dollar would remain strong. They favored technology and health care stocks, which were winning strategies.

Most said the Federal Reserve would act slowly to raise benchmark interest rates, and the Fed did wait until its final meeting of the year to make a move.

Our panelists are still down on the energy sector for 2016 and see little improvement in sight. They also are starting to see some opportunities in foreign markets, believe the dollar may continue to get stronger and have confidence that the Federal Reserve will continue to increase interest rates at a measured rate that should have little impact on the stock market.

Our experts’ predictions for the 2016 market are more divergent than they have been in the past. Turn to Pages D6 and D7 for highlights from our discussion.

How would you recap 2015?

Martha Pomerantz, partner, Evercore Wealth Management: I would say that this has been a tough year for people. We’re essentially flat point to point. But underneath the surface, there have been a lot of things that have gone on. There’s been a lot of volatility that we haven’t seen for a long time. There was a big snapback in August, and would have been a big recovery, but if you looked at the performance of individual stocks, you’d find that they had performed all over the map.

Craig Johnson, senior technical market strategist, Piper Jaffray: We look at the entire market on a weighted and an unweighted basis. On an unweighted basis, meaning pure [and] equally weighted, you only had two sectors positive on the year — financials and consumer staples. On a weighted basis, you had a few more, but it’s been more of a large cap driven advance. I found this year [2015] that not only did you have to get your sector calls right, meaning where you should be over and underweight, but you also had to get that market cap selection correct, too, to really have had a decent year.

Biff Robillard, president, Bannerstone Capital Management: In many respects, 2015 might be a year that individual investors take some satisfaction with just not doing anything incredibly dumb. You just got through it and didn’t lose a lot of money. You didn’t make a lot of money, but you’re still standing.

 

 

What are major investment themes that will drive investors in 2016?

David Joy, chief market strategist, Ameriprise Financial: I would begin with what you expect the pace of economic growth to be. You’ve heard mentioned already that the consumers may be strong in some areas, not so strong in others. Manufacturing has slowed down. When you add it all together, it seems as if we’ve just been in this lengthy pattern of OK, but not spectacular, growth.

Our own expectation for next year is that we’ll see GDP expanded at a rate of 2.8 percent. So that would be a little bit better than what we’ve experienced recently, and a significant part of that we think will be the consumer — not robust, by any means, and not back to the longer-term trend rate of growth in personal consumption, but better over time than it has been.

Mark Henneman, president and chief investment officer, Mairs and Power Investments: I think that that’s the big question, particularly from a firm that specializes in Minnesota companies. We’re very exposed to industrial companies here. Will the industrial economy kind of contribute to the growth that has really been led by the consumer? We think that would probably be the big thing to watch this coming year, if the industrial companies can participate and really kind of build off from what we think now is a low base.

Erica Bergsland, director of research and trading, Advantus Capital Management: I have a credit investor’s perspective here. Companies are going to be able to maintain the high margins that they have, that inflation will remain muted, and that companies will continue to have access to credit to buy back shares and to do M&A. And we are seeing some cracks, especially in that last story. We’ve seen the credit markets become much more disturbed than they have been in the recent past. We think that these signals that we’re getting in the credit market might indicate that there will be less funding available for some of the momentum trades, like shared buybacks and M&A.

Johnson: We have three overweights officially — financials, health care, consumer cyclical. And we are underweight on energy still — we have been since about 2011 — basic materials and utilities. And I don’t see really any changes happening with those underweights.

Doug Ramsey, chief investment officer, The Leuthold Group: At the end of each year, we run some of these simple 10 sector strategies. But we’ve actually got a lot of evidence supporting both a momentum or a pretty chart approach where you buy the top couple of sectors, two or three sectors, and ride them for the next year. That’s been, over a long period of time, a winning strategy.

We’ve also tested out — now, there’s an important distinction — an anti-momentum strategy. It’s a value strategy. So you buy the two or three sectors with the lowest P/E ratio, which right now would include energy, financials and utilities. And that’s also been a winning strategy. You just sort of need to pick one or the other, according to your psychological makeup.

 

 

How will a rising interest rate environment affect individual investors? (The roundtable discussion was two weeks before the Federal Reserve raised rates.)

Russell Swansen, chief investment officer, Thrivent Financial: This time I suspect that they will go much slower [in raising rates]. Historically, they don’t raise rates unless they feel like the economy is strong enough to withstand it. And, in fact, if you look at economic and [stock] market performance at the beginning of rate increases, they’re usually both going up. So I wouldn’t assume that just because the Fed begins to start raising interest rates that it’s negative for the economy or for the stock market.

 

 

How will demographic shifts affect the economy?

Carol Schleif, regional chief investment officer, Wells Fargo’s Abbot Downing: When you look at the demographics of the population, millennials being the biggest percentage of the population and the biggest percentage of the working-age population as of this year, they’re very conservative in the way they’re looking at things. They’re different in the way they’re looking at the way they want to spend. The peak birth year [among millennials] turned 25 this year, and that peak birth year is a bigger birth year than any single year of the baby boom.

That bears watching, because I think some of [their] influences on spending — they spend on experiences, they don’t necessarily spend on high-end consumer goods. They spend on technology. They are leery of the stock market, for a lot of different reasons, although at their age, there needs to be some growth in their portfolio somewhere.

Joy: This phenomenon, which there’s plenty of evidence of, is not a completely bad thing, because it implies that consumer spending will be more moderate in any given year, but elongated. In other words, the consumer has done a very good job of deleveraging their balance sheets over the last few years and very slow to ramp up spending, and it suggests, because they’re such a big component of the economy, that the expansion can be extended longer than the normal business cycle would suggest. It won’t be robust, and so maybe the growth potential is lower, but it could last longer.

Swansen: If you look at demographics around the world, the growth, or lack of growth, in the working-age population is pretty startling. In the United States, we have probably the best demographic profile, as a result of immigration and better birthrates, than in many other places. We talk a lot about the demand side of the economy, consumption and things like that, but if you think about the supply side, which is about how many people do you have working and how does productivity improve, you have a real problem with the number of people working. I think Japan is the worst case. The countries that have a bigger and growing labor force economically will do better. When you start talking about the stock market, it becomes a little trickier, though, because many of the companies that we think of do business globally, so they’re not entirely dependent upon whatever their home country economy is.

 

Will 2016 favor stock pickers or prognosticators who look at asset classes first?

Henneman: Well, I think that we’re set up to be more of a stock pickers’ market, given the fact that the market has been so narrow here, and with a number of tech stocks really leading the market here and leaving everything else for dead. So this is our sort of environment where we find great opportunities under the surface, and we think that that will be rewarded certainly over the long term.

Bergsland: Honestly, picking individual stocks adds a level of complexity that’s hard for professional investors, not to mention retail investors. So I think the most important thing for your readers to do today is to think about their longer-term financial goals and really understand their own risk tolerances and put a plan in place, consider some of these out-of-favor ideas that are very uncomfortable, but recognize we could be in a world of fairly muted returns for some time.

Swansen: If you’re not a professional, it’s very difficult to make good picks on businesses and industries where you don’t have some expertise. You’re at a vast competitive disadvantage vs. others in the market. I think you should focus on picking a good adviser. That’s where I would be a picker.

Schleif: The best investment decisions don’t happen from a place of comfort, and that’s where having someone that you can trust as an adviser to help you through those tough times — you know, both so that you avoid buying the hot item that everybody else wants to own and you avoid selling when everyone else wants to sell. I mean, realistically, it’s the only purchase, if you will, where people say, ‘Oh, it’s on sale. I don’t want to touch it. I’m going to wait until you mark it way up, and then I’m going to buy it.’

Robillard: The third P is for the investor to participate. You can’t really do well as an individual investor changing your mind a lot. Make a commitment, personal or otherwise, get in, tough it out, gut it out, but you’ve got to — you have to participate, not just watch.

Pomerantz: As the economy gets better and things start to heal and people start to feel better about things and we get farther from 2008, there’s a lot of money that could still come into the market, and this is a big, huge positive for us longer term. It will make a big difference. You’ll start to see people get involved, and I completely agree that the general concept is you have to be a participant. And so I think there are a lot of positives ahead for us.

 

 

What is your prediction for 2016 and how do we get there?

Joy: I’m at 2,225, which is about 6 percent from where we are now.

Swansen: I’m slightly more conservative, 2,150, which is about 3 percent in price, a couple percent in dividends, gives you a mid single-digit return, and expecting modest economic growth next year, positive but not aggressive. And I’m concerned that valuations are high. A lot of stuff has to go right to justify the level that valuations are at currently.

Henneman: All the same reasons, and my calculator came up with 2,160, a 4 percent return on the index, plus 2 percent dividend. Actually, I’d be pretty happy with that.

Pomerantz: I think it’s going to be 2,300. I’d say I’m at the higher end of the range. I think we’re going to be surprised at the healing that’s going to go on next year, that this has been a year of consolidation, and that that was healthy for the market. We’ve got a lot of this, you know, kind of the fluffy stuff out, and I think global growth is going to improve. I think inflation is going to stay low.

Ramsey: I think the market will rally furiously in the latter part of the year to finish at 1,907. That first year after the Fed goes into this tightening mode is usually a pretty difficult one, so I don’t think it’s going to be a great year, but it will create opportunities.

Schleif: 2,235, and I do think the markets will hit new highs next year. Economic fundamentals are pretty solid underneath. I think we could just kind of keep eking out this return, especially as we broaden out the performance by millennials and participation by millennials. I think you’ll see more volatility in the year, so how it rallies up through the year, it will be bumpier getting there.

Johnson: Our technical analysis suggests a measured move in 2016. We looked at the S&P 500’s consolidation from 2000 to 2013 and applied a breakout level to that range that suggests a price objective of 2,350.

Robillard: 2,450. Buy the cannons, we won the war. Investor sentiment is very, very intriguing. According to the American Association of Individual Investors (a weekly survey that measures the percentage of individual investors who are either bullish, bearish or neutral on the stock market for the next six months), the weirdest thing has been going on. The number of neutrals is extraordinarily high. There’s fewer bears and fewer bulls, but there’s this big bulge in the middle. And I consider that oily rags lying around in the garage that are going to burn later. I think the cocktail looks like you’ve got good stuff coming, and because it seems so wrong, it just — it feels right to me. So I think next year is going to be a surprisingly good market, so buckle up.

Bergsland: I’m going to listen to the credit markets and think that we’re going to have fairly muted returns next year, and I’m going to go with [Swansen’s] number, 2,150.