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2016: Not So Happy New Year?

2016: Not So Happy New Year?
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Monday, 04 January 2016 02:31 PM Current | Bio | Archive


On balance, the popular financial press has chosen to spotlight lots of pessimistic predictions for the year ahead. No wonder the Bull/Bear Ratio compiled by Investors Intelligence ended up near 2015’s lows with a reading of 1.24 during the 12/22 week.

On the other hand, according to a 12/12 Barron’s survey, 10 of Wall Street’s top investment strategists are forecasting that the S&P 500 will rise to 2220 this year on average. Melissa and I have compiled links to a bunch of articles with a pessimistic outlook for 2016. There will likely be more panic attacks about these issues this year, as there have been since the start of the current bull market.

Here is a brief overview of what the pessimists are worrying about:
 
(1) Global economic growth worsens. According to a 12/30 Reuters article, Christine Lagarde, head of the IMF, believes that “global economic growth will be disappointing next year and the outlook for the medium-term has also deteriorated.” Indeed, many forecasts for global growth don’t project anything much higher than 2.0%-3.0% for advanced economies and 3.0%-4.0% for emerging markets. (See, for example, the IMF’s October 2015 World Economic Outlook.) In a 12/19 Barron’s interview, David Levy of the Levy Forecast went as far as to say that odds are the “slowly spreading global recession” will “engulf the entire planet” this year. In his grim forecast, it would be the first US recession caused by a downturn overseas.
 
(2) Europe disintegrates. Europe is obviously a big mess, and it could get messier. The ugliest items on the 2016 worry list for the region include a “Brexit,” more terrorist attacks, and an out-of-control refugee situation. Bloomberg’s late December “A Pessimist’s Guide to the World in 2016” included the prospect of the U.K. leaving the European Union. That would cause global banks, hedge funds, and manufacturers to move operations elsewhere as they seek to stay within the free-trade bloc. Making matters worse, the Paris terrorist attacks have increased the risk of disruptive political and policy shifts, Rebecca Patterson of Bessemer Trust recently told Bloomberg. Politics aside, more terrorist threats could further jeopardize consumer spending, inbound tourism, and cross-border trade. It doesn’t help Europe also to have a massive influx of refugees, Harvard Professor Niall Ferguson said in a 12/26 Barron’s interview. He sees more downside than upside for the European economies from the tidal wave of immigrants.
 
(3) Chinese growth slows more than expected. Perhaps one of the biggest 2016 wildcards is how China’s growth will fare as it pivots from a manufacturing-to service-based economy. The pessimists’ view is that China’s growth will fall below the government’s target and that the spillover to other regions could get nasty. David Levy told Barron’s in his interview cited above that “the more bullish consensus view underestimates the linkages” between the US and EMs including China, which may have “a very tough time” as it “tries to refocus its economy.” Niall Ferguson said in his Barron’s interview that “a policy error in China” could cause “huge instability,” having an effect on all other emerging markets. This week’s Barron’s features an article by Jonathan Laing titled, “The Trouble With China.”
 
(4) Commodity bust triggers credit crisis. A 12/28 Reuters article titled “Wall Street in 2016: What could possibly go wrong?” observed, “U.S. crude is now about $37 a barrel, down more than 65 percent since June 2014. Should the prices of oil and other commodities fail to firm, the risk is of spreading deflation, as declining earnings in those sectors spread to financial firms, suppliers and more,” thoughts attributed to John Manley, chief equity strategist at Wells Fargo Funds Management. If oil prices continue to fall into a bottomless pit, oil-exporting nations could implode economically and politically, unleashing all sorts of problems for the global economy.
 
(5) Fed’s rate hikes unsettle. Following last year’s 12/16 one-and-done rate hike, Fed Chair Janet Yellen stressed that additional monetary tightening would be gradual this year. Two days later, FRB-Richmond Fed President Jeffrey Lacker said that four hikes in 2016 would be gradual, in his mind. A few days before, the 12/12 Barron’s reported that David Kostin, Goldman Sachs’ chief US equity strategist, believes “the market’s P/E multiple will contract as others come around to [the four rate hike] view.” Future rate hikes were also on Reuters’ 12/28 list of potential problems in 2016. It noted one of the obvious resulting negative impacts: “As rates rise, stocks could become less attractive compared with other asset classes like bonds.”
 
(6) Soaring dollar clobbers US exports and S&P 500 profits. Also on Reuters’ worry list is that the dollar continues to soar as the Fed hikes interest rates, diverging from the easy monetary policy path taken by other major central banks. “[The dollar could] shave 3 to 4 cents from first-quarter earnings of U.S. companies with foreign exposure,” noted a currency expert in the Reuters article. Not only that, but “profit gains haven’t looked so punk since the bad old days of 2009” observed the author of the 12/12 Barron’s article cited above.
 
(7) Geopolitical instability proliferates. In his 12/26 Barron’s interview, historian Niall Ferguson accentuated the geopolitical negatives: “I expect next year to be more violent than 2015. Many investors don’t realize that since the outbreak of the Arab Spring in 2011, fatalities due to armed conflicts are up by about a factor of four; terrorism is up by a factor of six.” A few specific concerns on the pessimists’ lists include: the US ceding regional power to China or Russia, the Islamic state attacking Middle East oil production, and Russian or Iranian hackers launching cyber-attacks on the US financial sector. They undoubtedly will add instability in Saudi Arabia following this weekend’s mounting tensions with Iran after the Saudis executed a popular Shiite cleric.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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On balance, the popular financial press has chosen to spotlight lots of pessimistic predictions for the year ahead.
new year, invest, economy, worry
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2016-31-04
Monday, 04 January 2016 02:31 PM
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