Many investment strategists publish their lists of the likely surprises for the year ahead at the start of new years. I’ve resisted doing so mostly because the market is saturated with such lists at the start of every year. Besides, who wants to go head-to-head with Byron Wien, who cornered the market in year-ahead surprise lists many years ago?
I must say, though, that I don’t disagree very much with his just-released list for 2016. In any event, I tend to start thinking and writing about the year ahead around September.
Consider the following:
(1) Global growth should remain lackluster.
Actually, all last year, Debbie and I argued that secular stagnation would continue to weigh on the global economy. That’s neither a boom nor a bust, just more of the same subpar growth. The sources of this world-wide stagnation are too much government, too much corruption, too much debt, too many regulations, too much capacity, and too many old people.
We use the IMF’s world growth projections as a useful benchmark for marking our forecasts up or down to reflect our views. Debbie and I share the IMF’s current relatively weak outlook for 2016 real GDP for the world (3.6%), advanced economies (2.2), emerging market economies (4.5), the US (2.8), Eurozone (1.6), UK (2.2), Japan (1.0), China (6.3), India (7.5), and Brazil (-1.0).
If there are surprises, they are likely to include better-than-expected growth in the US, boosted by consumer spending (in response to lower gasoline prices and higher wages) and fiscal stimulus (thanks to the latest congressional budget agreement). The offsets are declining exports (in response to the strong dollar) and weaker capital-spending growth (as energy companies spend less on plant and equipment).
We aren’t expecting any upside nor downside surprises in Europe and Japan. However, downside surprises are more likely in China and Brazil, while India could surprise on the upside.
The latest data on world industrial production show a modest gain of 1.7% y/y through October. Output is up only 0.5% among the advanced economies and 2.9% among the emerging ones.
(2) Global inflation should remain subdued,
with some signs of deflation and few signs of reflation. IMF data for the world CPI show an increase of 2.3% y/y through October, the slowest pace since October 2009. Inflation was just 0.2% among the advanced economies through October, and 5.1% among the emerging ones through September. The IMF is projecting an increase to 1.2% this year for the former and no change at 5.1% for the latter, though the price of oil is expected to be down again modestly by 2.4% following the 46.4% plunge last year.
We agree that there probably isn’t much more downside in the price of oil, nor is there much if any upside. So energy should stop weighing on the overall inflation rate, which therefore might edge up slightly for the advanced economies, as the IMF predicts.
For now, Eurozone inflation remains well below the ECB’s target of 2.0%. In December, the headline rate was up just 0.2%, while the core rate was 0.9%, according to the flash estimate. In the US, the headline CPI is up only 0.5% during the 12 months through November, but the core rate is at 2.0%. However, the Fed focuses on the PCED measure of inflation, which was up during November by 0.4%, while its core rate was 1.3%. Fed officials are expecting the latter to move closer to 2.0% this year. Nevertheless, the recent renewed plunge in oil prices and strength in the dollar could trickle down to keep a lid on core price inflation.
(3) Commodity prices are likely to remain depressed
in this global economic scenario. However, they may not have much more downside as long as the global economy continues to grow, albeit at a subpar pace. Indeed, the CRB raw industrials spot price index has firmed in recent days despite ongoing worries about a global economic slowdown.
For the price of oil, the surprise could be on the upside if geopolitical events destabilize Saudi Arabia. Barring such an event, the surprise for oil prices is more likely to be on the downside, especially if the Saudis continue to flood the global economy with oil aiming to punish and impoverish its adversaries, both the political (Iran and Russia) and economic (US frackers) ones.
Other commodity prices may also have more downside as producers are forced to supply more commodities in a vain effort to generate more revenues to meet their debt-servicing costs. The 1/4 WSJ included a very bearish story about the mining industry titled “Supermines Add to Supply Glut of Metals.” The miners responded to the commodity super-cycle hype by expanding too much:
“Those giant mines are now giving the industry an extra-bad hangover during the bust. The big mines cost so much to build and extract minerals so efficiently that mothballing them is unthinkable--running them generates cash to pay down debts, and huge mines are expensive to simply maintain while idle. But as a result, their scale means they are helping miners dig themselves even deeper into the price trough by adding to a glut.”
New technologies have only worsened the glut: “At the same time, new mining technologies, like bigger haul trucks, shovels and other equipment, enabled the building of facilities that could produce two or three times the copper or iron ore of the previous generation of big mines.”
(4) Interest rates should remain historically low.
Yesterday, in our review of the worry lists for 2016 compiled by the pessimists, Melissa and I observed that they include as many as four rate hikes by the Fed this year. This scenario implies a very optimistic outlook for the US economy. It would certainly cause the dollar to soar, which would certainly depress US exports and corporate profits. The pessimists are arguing that four rate hikes would be bearish for the valuation multiple on stocks.
Sorry, but this scenario just doesn’t make much sense to us. We think the strong dollar is already weighing heavily on the US economy and inflation outlooks for 2016. So a one-and-done rate hike looks more likely than a four-and-done scenario to us. The surprise might be none-and-done. The biggest surprise of them all would be one-cut-and-done! As we predicted last year, we are predicting that the 10-year Treasury bond yield will be range-bound between 2.0% and 2.5% this year.
(5) Stock prices should move higher this year.
Since Joe and I remain secular bulls, a bear market in 2016 would certainly surprise us. We wouldn’t be surprised if stocks are flat again this year, as they were last year. However, we are sticking with our 2300 target for the S&P 500 this year. Last year’s performance was weighed down by a 23.6% drop in the S&P 500 Energy sector. In any event, it now accounts for only 3.7% of the S&P 500’s earnings and 6.6% of its market capitalization. We expect that the big sectors--particularly Consumer Discretionary, Consumer Staples, Financials, Health Care, and IT--will deliver higher earnings and stock prices.
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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