People agree on few things regarding the financial markets, but most agree that the markets hate uncertainty. Boy, are the financial markets going to hate 2016.
China’s economic growth, or lack thereof, is one uncertainty. Europe’s economic path is a big question mark, too. The turbulent oil market doesn’t add much certainty to the picture. Add to that the question of how far and fast Federal Reserve will raise interest rates, and you have plenty of looming questions. Furthermore, the presidential election cycle, which typically is a plus for stocks, might not be a factor, because the incumbent isn’t running.
This doesn’t mean that stocks won’t rise in 2016—the experts with whom we spoke say they likely will—but the ride could be considerably bumpier than it was in 2015, and that’s saying something: Market volatility reached a fever pitch in August 2015 as worries about interest rates and global economic vitality flustered the market. Our prognosticators see a continued subpar recovery, modestly higher U.S. interest rates, a slow increase in oil prices and a volatile but ultimately profitable stock market.
THE ECONOMY. The consensus among economists is that the U.S. economy will expand at a 2.5 percent pace in 2016, which is almost exactly the pace at which it grew in 2015. “The economy seems quite stuck at 2.5 percent,” says Michael Englund, who is the chief economist for Action Economics, which is a consulting company.
Why the slow growth? Several reasons, including the strong status of the U.S. dollar.
It took $1.21 to buy a euro at the start of 2015, and by late November 2015, you could get a euro for about $1.06. Other currencies, such as the Turkish lira and the Brazilian real, have fallen by more than one-third against the dollar. That’s great for U.S. tourists abroad, because it boosts the dollar’s buying power. However, a strong dollar makes U.S. exports more expensive for foreigners to buy, and that’s bad for U.S. manufacturers. “Exports are unusually slow,” Englund says.
What the Consensus Predicts
Economists expect the dollar to remain strong and exports to be weak in 2016. Why? All other things being equal, money flows to the currency that has the highest interest rates. Although the bellwether 10-year Treasury note yield is unusually low by historical standards, it towers above the 10-year yields of other industrialized nations. In early December 2015, the U.S. 10-year T-note yielded 2.18 percent, while Germany’s yielded 0.47 percent, Japan’s yielded 0.31 percent and Switzerland’s was minus 0.42 percent.
The dollar’s strength poses an additional problem: It’s tough on countries that have a weak currency. To keep their currency from falling further against the dollar, those countries have to raise interest rates—which slows their economy. Brazil, for example, has seen its 10-year bond yield soar to 15 percent from 12 percent at the start of 2015. That means that if you pin your hopes on an emerging-markets stock or a bond fund in 2016, you could be disappointed.
Experts also point to the age of the current economic recovery, which began in June 2009. Historically, that makes it a bit creaky. “The major upside surprises are behind us,” says John Lonski, who is the managing director and chief economist for Moody’s Capital Markets Research Group. As of Jan. 1, 2016, the recovery was 80 months old, which is almost 22 months older than the average post-World War II expansion. Economic expansions have no time limit, of course, but they don’t live forever, either. “The recovery and the business cycle are past their prime,” Lonski says.