With a Fed rate hike looming, retailers in rocky territory and oil prices near historic lows, 2016 is shaping up to be a very busy year for the markets.
In his annual year-end interview with CNBC Stocks Correspondent Bob Pisani, UBS Director of Floor Operations Art Cashin gave some advice on what investors can expect in the year ahead, and took a look back at what we learned in 2015.
'Roller coaster year'
It was a volatile year for the S&P 500, despite ending nearly flat, and a year of huge disparities among sectors, as investors in oil stocks aggressively bought at four different dips in the market this year…and were crushed each time. Giants in old-school retail cratered as well, with Macy's, Michael Kors and Kate Spade down 40% for the year. department stores Nordstrom and Kohl's are also down sharply.
But there were some bright spots: auto stocks including O'Reilly and Autozone were up over 20%, home improvement companies Lowe's and Home Depot had strong showings, and online retailers Amazon and Netflix had a great year, reflecting underlying demand for consumer goods other than apparel.
"2015 was like commuting by roller coaster." Cashin said. "This has been one of the more difficult markets I've seen in 50 years…I've spent time and time again trying to figure out what action causes what reaction and how do things fit in. And in the past several weeks, it really hasn't fit."
'Profit recession' could continue in 2016
Cashin said continued strength in the dollar could mean the profit recession extends into next year. This year, the strong dollar has weighed heavily on multinational companies' earnings.
"There will be pressure on profit margins, and that will naturally lead to further pressure on earnings. Revenues will continue to be a problem- people have lost on revenues, but managed to beat on the bottom line; that's going to come under real pressure," Cashin said.
Oil in the driver's seat
No other factor dominated the stock market the way oil did in 2015. Stocks sank when a brief oil rally failed to hold in February, rallied when oil rallied in April and May, and sank again when oil moved to new lows in July and August. In the last week, oil fell below $40 a barrel, at one point settling at its lowest level since 2009.
"My gut tells me that it will stay low through the first quarter of next year," Cashin said. "They will have to cut down to the bone to keep dividends safe. There will be no new investment in a variety of areas."
"Oil will remain weak in the early part of 2016 and then you will begin to see some producers go out of business, those that do not worry about the dividend, but in fact are living hand to mouth, will fall apart."
Fed rate hike on the table
The market spent much of 2015 parsing economic data, gaming out whether the Fed would finally raise rates for the first time in nearly a decade. Following recent strong jobs data and many key FOMC members speaking in support of raising rates, expectations are that the Committee will hike in December. Cashin says he expects that once the rate hike happens, liftoff will be very slow- and the market seems to agree.
"The Fed fund futures market for December of 2016 shows a fed funds rate of under 1%; for all the talk they are going to raise it once a quarter, they are going to do whatever, most markets don't think that is going to be the case," Cashin said.
Why such low expectations for the glide path? Cashin thinks economic uncertainty, a slowing China and a strong dollar are all contributing factors.
"I think part of that is based on the fact that people think this economy is still weak enough, unstable enough that when they (the Fed) make this move, they aren't entirely sure where they are going to go," he said.