Next 12 months look bright for the market ... but not too bright

Stocks have been through a wild ride in 2016. They have been down more than 10 percent in the winter, which technically means a market correction, and now up little more than 1 percent for the year.

What's next? Nothing too exciting, because positive factors outweigh negative ones — although not overwhelmingly.

Looking ahead 12 months, it wouldn't be surprising to see the market climbing 4 percent to 7 percent from here. Of course, Wharton professor Jeremy Siegel famously wrote in his classic book "Stocks for the Long Run" that stocks have averaged a 7 percent return for the past 200 years, and that's after inflation. So in real terms, a 7 percent advance means around 5 percent these days.

No one has a crystal ball, and anything can appear out of the sky to demolish equities' performance. Two years ago, when oil (NYSE Arca: OIL) cost more than $100 per barrel, who could foretell how low its price would fall and how much that would punish markets around the globe?

One plus is that oil is nudging upward again. After tumbling to $28 in the winter, it's now more than $40. Odds are that it will stay higher, as many producers cut back.

Oil's low prices have proved to be a mixed blessing: good for consumers who drive and heat their homes, and bad for energy companies, a number of whom have gone bust. If oil prices improve some more, then maybe the oil companies can regain their footing and the public can still enjoy relatively low costs at the gas pump.

Other positives are mild yet hard to dismiss.

For instance, the Federal Reserve's gradual rate-hike schedule. The central bank's policy is the most important factor. The late, great market savant Marty Zweig once said: "Don't fight the Fed."

Low interest rates are good for stock investors because they juice the economy: They make corporate borrowing — and thus growth — easier, and they also free up cash for consumers to spend.

The Fed raised short-term rates by a quarter percentage point in December, but that didn't go very well. This move was part of the reason the market stumbled in the winter.

Fed Chair Janet Yellen has since moderated her timetable for rate hikes. Where the expectation was once for three or four more hikes in 2016, the more likely course is for just one later in the year. That pace should be slow enough not to rattle the market.

The economy is strengthening — really. True, the long expansion since the recession ended in 2009 has been sluggish, about 2 percent per year. Gross domestic product grew at a 1.4 percent annualized rate in the final quarter of 2015. Analysts believe that, when it is announced in May, GDP for this year's first quarter will inch ahead by only 0.2 percent.

But the first period's minimal advance likely is due to temporary problems, such as in the energy industry. The trend lately has been for a weak first quarter, followed by more robust ones for the rest of the year. That was the case in 2014 and 2015. A stronger economy would help value stocks, as well as those in the industrial and financial sectors, all of them laggards.

Consumer sentiment is healthy. Yes, it is down four straight months in a row, but only by a small amount. This reading tends to be a contrary indicator, meaning that negative results typically lead to a springing back.

That's what University of Michigan researchers conclude after sifting through the numbers of their consumer survey. They expect consumer spending will rise by 2.5 percent this year. Not a bonanza, but not bad, either. The recent dip is not particularly jarring when placed in context: The consumer sentiment index is up almost 50 percent from the end of 2011.

Investor sentiment is less bullish. This is even more of a contrary indicator. The American Association of Individual Investors survey shows an optimistic outlook for only about 27 percent. In late 2014 it was 58 percent.

What happened next? The Standard & Poor's 500 index (INDEX: .SPX) stayed flat well into 2015, then suffered a painful downdraft in late summer and another this past winter. The numbers suggest that a market climb may be in the offing.

There are a few of negative signs to deal with. Earnings are off. The FactSet estimate for the first quarter has S&P 500 companies' profits sliding 7.6 percent versus the prior year — the fourth decline in a row.

The last time this occurred was 2008's last quarter through the third quarter of 2009; in other words, during the Great Recession. And a large number of companies have issued negative guidance for the quarter.

Certainly, a lot of the current earnings falloff is concentrated in the hard-hit energy realm. But when you take out energy, there's not a lot of earnings momentum. Financials and materials are also at a low ebb.

The dollar is too high. Almost half the sales of S&P 500 companies (which are the largest ones) are generated overseas. The result is that American goods and services are at a competitive disadvantage with an overvalued dollar.

And when revenues from other countries return to the United States, the unfavorable exchange rates translate into less money.

— By John E. Maloney, chairman and CEO of M&R Capital Management

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