Problems could include a government shutdown, fiscal inertia by Congress, an accelerated drop in China's growth, a monetary policy mistake or an unknown "Black Swan" like the current Volkswagen scandal.
Any of those could contribute to weaker markets that fall below -- maybe well below -- my baseline expectations.
That's why I'm currently positioned in market-neutral territory. I simply have too much respect for the money I've earned for my investors to take on too much risk in such an uncertain climate.
With that in mind, here are my current expectations for the market:
- I don't expect 2016 to be a positive year for stocks. The main indices won't likely eclipse the major top they established in 2015's first half any time in 2016.
- The S&P 500 (SPY) has likely successfully tested the capitulation low of about 1875 reached in late August, when the index hit four standard deviations below its moving average. That bottom produced new 52-week lows in 1,335 individual stocks -- the greatest since 2008. (New highs only averaged about five per day last week.) While this test has been successful, several additional tests seem possible over the next few months.
- The market has been reset lower as reality set in. After some more testing, I expect the S&P 500 to spend the next six months or so in a broad range of 1850 and 2025.
- Unless fundamentals change, there's an equal upside reward and downside risk at current market levels.
- I estimate the S&P 500's full-year return will come in at a high-single-digit decline (between a 5% and 10% loss). That's in line with my beginning-of-the-year expectations.
- The contrarian view would more likely be a leg lower than a leg higher.