2016 – A Look Ahead

2016 – A Look Ahead

For a recap of 2015 click here.

2016 started out with a resounding thud. Concerns about China spread and made the beginning of the year rather adventurous. We expect anxiety regarding China’s growth and the price of the yuan to continue to play heavily in market sentiment throughout the year.

Besides China, we expect oil, the migrant crisis in Europe, the strength of the dollar, terrorism and interest rate hikes to be the main drivers for the market. While the Presidential election could be interesting, we feel it will have little impact on market psychology.

China continues to move markets as growth normalizes and the world adjusts (to read more on China, click here to our blog). The yuan should continue to weaken against the dollar, along with most major currencies, which should strengthen Chinese exports and help to offset some of the slowdown. While the world is pessimistic about China right now, China could surprise on the upside. The People’s Bank of China has stimulus in the pipeline and credit growth has accelerated.

We expect the dollar to continue its strength due to the Federal Reserve’s desire to normalize interest rates. In December, the Fed moved away from its zero interest rate policy and raised rates 25 basis points. Now the market is pricing in  two more similar rate increases this year, with some participants expecting four. We believe four may be a stretch—two are highly probable—but the decision will be data driven.

The economy ended the year with GDP growth coming in over 2%. However, because of low oil prices and the dollar’s strength, there is a profound dichotomy in the economy. Manufacturing growth, outside of autos and consumer staples, has ground to a halt. Consumer stocks should continue to benefit.

Given the current environment, oil prices could remain low throughout the year (for more on why the price of oil is low, click here to read our blog). The decline in oil prices is due simply to oversupply. Demand for oil is healthy, but the Saudi drive to push out non-OPEC producers and retain market share has kept production above demand by almost 1.5 million barrels per day. Non-OPEC production, especially in North America, has remained robust due to hedging activities, but this should start to weaken. However, given the production estimates, the oversupply could last until 2017. The Saudis are preparing for a long stretch as well. To decrease their budget deficit they have proposed new taxes, spending cuts, and cuts in social spending. Additionally, continued dollar strength would put further pressure on oil.

Lower oil prices and a strong dollar should aid the struggling economies in Europe and Japan. Both areas are net consumers of oil and should benefit from the cost savings, while the dollar’s strength should improve their exports. Given the low inflationary and growth environment, we expect fiscal policies in both areas to remain stimulative.

Europe’s migrant crisis, which came to the forefront last year, will not abate. Governments will continue to struggle with a solution as internal politics clash, from those desiring to spend more in aid to those wishing to take a tougher stand and close the borders. Already, because of this and the Greek debt crisis, far right and far left political parties are gaining clout. The idea of pan-Europeanism will endure further stress.

Terrorism will remain a heightened threat due to the flood of Middle Eastern refugees into Europe and the West’s expanded role in the war against ISIS. Although terrorist attacks in Europe dominated the news at different times throughout the year, markets were little fazed.

While we seem to have an abundance of negativity, the markets reflect this sentiment and we have already endured a quick downturn. Discerning quick corrections from disastrous sell-offs is only possible after the fact. Jumping in and out of the market is the biggest threat investors have to reaching their goals. That is why it is important to build a well-diversified durable portfolio, one that can weather the good times as well as the storms. As a result, the portfolio will always have winners and losers, but this year’s winners could be next year’s losers and vice-versa.

We would like to hear about your thoughts for 2016. Please send us your comments, and for more on our 2016 expectations look for our video in the coming week.

 

Washington Trust Bank believes that the information provided was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

 

 

 

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