2015 was a disappointing year for most investors, with stomach-churning volatility, and returns that ended the year mostly negative. But the start to 2016 has been decidedly worse. Concerns surrounding Chinese growth, and another devaluation of the Chinese currency, sent global markets into a tailspin. Scarcely a week has passed, and the S&P 500 is down over six percent for 2016.
Despite the market’s sour mood, U.S. economic conditions are actually holding up quite well. So much so if fact, that the Federal Reserve last month decided to raise their benchmark Fed Funds rate for the first time in nearly a decade from 0.00% to 0.25%. For its part, the Federal Reserve is signaling that the financial crisis of ’08-’09 is finally behind us.
And recent economic data supports the Fed’s confidence. Employment is expanding, and wages finally appear to be rising. At the same time, gasoline and other commodity prices have fallen considerably, creating a potentially beneficial situation where workers are earning more, and each dollar goes farther.
2016 Outlook Summary
During the first half of 2016, one should expect volatility in economic data and the financial markets, as the world adjusts to dramatically lower commodity prices. Clearly, there will be winners and losers among countries and industries, as not everyone benefits from lower prices.
Despite near-term volatility, U.S. GDP growth is expected to average 2%-2.5% during 2016, with overall global growth closer to 3.5%. In other words, in the absence of major shocks, the economy of 2016 should resemble the performance of other recent years.
The expectation is that no major economy—including China—will fall into recession during 2016. In addition, it is likely that the Fed will pursue three more one-quarter percent rate hikes during the year, even though inflation will remain well below 2%.
In terms of investing, I think the current pessimism will give way to a more optimistic spring. While the New Year selloff is upsetting, it doesn’t alter the foundation of the current bull market, which is: modest growth, low interest rates & inflation, and a strong U.S. dollar. Add to this an economy that is generating roughly 3 million new jobs annually, and lower commodity prices, and one could easily conclude that 2016 might shape up to be a relatively good year.
That said, China is the second largest economy next to the U.S. And should the situation in China turn from a slowdown to a full-blown economic crisis, then the markets and economies of the rest of the world are sure to suffer. At this point, however, the damage seems to be contained.