These U.S. Stock Market Headwinds Have Disappeared

The U.S. stock market was running up against some major headwinds for most of 2015. That is why the S&P 500 failed to make a meaningful new high this year.

The good news is that as 2015 draws to a close, these headwinds have all disappeared. As a result, the S&P will have an easier time going up in 2016. Double digit returns for the S&P in 2016 would not be shocking despite the S&P's lackluster performance in 2015.

Below are 4 headwinds that have disappeared.

Fear of earnings slowdown

There was a real fear that earnings reports would miss expectations across the board in Q3 2015.

Q3 earnings data witnessed the largest drop in earnings since Q3 2009, when the U.S. economy was just climbing its way out of a massive recession. In addition, earnings contracted for the first time in six years (also since the last recession ended).

This has got many investors worried about how long the U.S. stock market could hold up in the face of such bad earnings.

The good news is that this "weak earnings season" was superficial. Yes, it's true that earnings reports as a whole have been going down for quite some time. However, most of this is due to weak earnings reports from energy and basic material companies. Earnings reports from ex-raw material companies are still growing.

Commodity prices are most likely set to rise. Even the Federal Reserve thinks that the weakness in oil and other commodity prices will end soon.

Hence, it is logical to assume that if commodity prices rise soon, U.S. corporate earnings as a whole will improve in the near future. Weakness from energy and raw material companies will fade. This will be a boon to the U.S. stock market.

The U.S. dollar's bull market is over

The U.S. dollar was in a massive bull market from Q3 2014 to Q1 2015. A strong U.S. dollar is bearish for the U.S. stock market.

It's very likely that the U.S. dollar's bull market is over. The U.S. dollar has already completed the final stage of a classic "bull market". Classic bull markets follow this pattern.

1. First parabolic wave. This is when the market starts to rise rapidly and value investors scream "bubble!". However, this is not the end of the bull market. The U.S. dollar's recent bull market completed this stage from mid-2014 to March 2015.
2. The big correction. This is when the market starts to consolidate sideways in a massive range. The U.S. dollar completed this stage from March 2015 to August 2015.
3. A new high. This is when the market breaks out to new highs. The market may make a massive new high, but more often it'll make a marginal new high. The U.S. dollar just made a new high last week.

With the U.S. dollar about to decline, this pressure on U.S. stocks will disappear. In addition, a cheaper U.S. dollar boosts American exports, which will boost U.S. corporate earnings.

U.S. economic growth is back on track

There was a real fear in October that the U.S. economy might slide in a recession. Two consecutive months of terrible jobs reports convinced many investors that the U.S. economy was being dragged down by Europe and China.

I said in October that there was no point in worrying about the U.S. economy. Two months of weak jobs reports is normal during economic expansions. It does not mean that a recession is imminent. The employment data is very noisy, which means that unless there's at least 3 consecutive months of weak jobs report, there's nothing to worry about.

In fact, there was a month in 1997 when the U.S. economy lost jobs. This happened despite 1997 being one of the best years for U.S. jobs growth!

Fast forward two months, and it seems that the U.S. economy is back on track. The employment data is good, and other economic indicators are pointing to growth.

*Special note: manufacturing is not a very good indicator for the U.S. economy. Historical data shows that manufacturing sometimes contracts when the economy is growing robustly.

The Federal Reserve has made a decision

The Fed will hike rates at its December meeting. At long last the bad news is out. Fear of a rate hike often caused the S&P to decline 1-2% in a single day in 2015.

Now that we know for sure when the first rate hike will be, this looming cloud over the market is gone. When all the bad news is out, it's time to buy stocks. The worst case scenario is already in.