Economic forecasts hold many records for failure. Time and time again sage observers get it wrong. Market performance and business activity are elusive sprites tempting us in a direction only to appear in an entirely different place when we arrive. But making the trek to the oracle, or reading the tea leaves, or scattering the runes is something we need to do each year. We all need to plan. Planning requires a context and a viewpoint. A viewpoint requires some insight on global activity and analysis of risks.
So, this month, I’ve asked several key members of the EverBank team to weigh in on their prospects for 2016. They aren’t all the same, as each has a different lens through which to view the world. Putting them all together can give you a place to start with your own planning.
CAMERON N. BEANE
Director of Secondary Marketing
We have it all figured out, right? Over the last 25 years, there have been so many times that the “market” has truly believed it has the forecast right, and policy makers, the Fed, or other market participants have it all wrong. This quandary has never been more important, or more pronounced, than I believe it is right now.
It has been about 10 years since the Fed adjusted monetary policy by tightening it, and roughly 14 years since the market forecasted a massive recession by creating a wildly inverted/convex yield curve. And, through it all, it took policy makers 2 to 3 years to come to their senses and admit that we were better or worse off than what the market had been forecasting. If all of that doesn’t help you sleep well at night, I’m not sure what will.
Further, policy makers have started to realize that housing is in dire need of additional, more accommodative credit policies to make getting a loan easier. Contrast that with regulations that have made it more difficult to get a loan by asking for more and more documentation, protections, larger data sets, longer due diligence reviews and more legal protections.
All of this has to be more efficient, right? Here’s some of what I’m expecting to transpire in the New Year.
Short-Term Rates on the Rise; Longer-Term Rates Holding Firm
There’s a lot of consensus on this, and I see this as a good thing for consumers since most of their borrowing costs are unlikely to rise much. I see it as bad for most banks since spreads could become compressed. I also predict that more and more hedge funds and other unregulated, or lightly regulated enterprises, will crop up and dominate market trading.
2016 Rate Increases: Pick Your Number
If you ask the Fed, they’ll tell you that four rate increases are possible through 2016. The market, however, tells a different story, expecting no more than two.
While we see that jobs are being created and the unemployment rate is dropping, the absolute level of underemployed is not moving anywhere. Consumers have recently “received a raise” from some savings generated through lower gas and other commodity prices. In my view, no outright innovation exists. Employers and employees are destined to repeat every conceivable aspect of the "Peter Principle" over and over again.
We are driving down a road with dangerous curves ahead, and we will certainly have to swerve for the occasional rock or two. Change is on the horizon, and a cautionary tone is bound in the markets for 2016.
JOSEPH STOLZER, CFA
Portfolio Manager, EverBank Wealth Management
We now have the first interest rate increase behind us without any major fireworks for equities, but the issue of the Fed won’t be going away soon as we could see 3 to 5 rate hikes in 2016 — if the economy goes as the Fed plans. Oil prices and currency headwinds won’t be going away either, so let’s take a look at what this could mean for 2016.
Will the Currency Headwinds Continue to Blow?
Listen to any earnings call from a U.S.-based multinational this past quarter and it’s likely that you heard the phrase “currency headwinds.” This has been a major theme as of late, and one that’s likely to continue into 2016, as companies are required to translate foreign currency sales back into a strong U.S. dollar.
Will the Power Return to the Energy Sector?
The energy sector was by far the worst performing sector in 2015, with the troubles and volatility likely to continue into 2016. The decline in energy prices essentially created a transfer of wealth from equities in the business of energy production to consumers and equities that are major consumers of energy. From a long-term perspective and compared to historical valuations, the energy sector looks to be undervalued. The main question for 2016 will revolve around how long oil prices will be depressed and whether or not we will see a rebound in prices in 2016 as we continue to expect oil prices to be a major factor for energy-related equities.
The flipside is that lower energy prices put more money into the consumer pocket, which should provide support for equities in the consumer discretionary sector. For clues on what to expect in 2016, it will be important to see the impact lower gas prices had on consumer purchasing during the recent holiday season.
Overall, we remain optimistic on U.S. equities. Investors should no longer expect the strong equity returns that we had in 2013 and 2014, but company fundamentals and the U.S. economy remain strong enough to support equities. We are hopefully on the path toward a more normal monetary policy, and with that, we should expect a bit more volatility reflective of a more normal environment for equities.
Founder and Editor, The Daily Pfennig
Currency prices appear fickle and volatile from time to time, but there’s an underlying logic. I’ve been observing currency price behavior since the 1970s and find that major markets tend to follow long trends driven by large fundamental factors. That doesn’t mean that there isn’t volatility, and reversals do happen sometimes along the way.
So, Will the Dollar Come Back to Earth in 2016?
From early 2002 until 2014, the U.S. dollar grew progressively weaker outside of a few short-lived rallies in 2005, 2008, and 2011.
In 2014, things changed.
After all the chaos and uncertainty of the Great Recession, the trade deficit — and its companion current account deficit — had narrowed significantly. On a relative basis, the U.S. fiscal policy was in decent shape. Monetary policy on an absolute basis remained loose, but when compared with Europe and looking forward, it was falling in to line. Talk of the Fed raising rates started in 2014, too. These were fundamental changes that would begin to send the U.S. dollar higher and end one of the longest trends in recent history.
Since 2014, the U.S. dollar has been quite strong. Some of this strength comes from the fact that other economies are just doing badly – it always helps to be in better shape. Some comes from the year-long expectation that the U.S. Fed would raise rates. Still more comes from the flight to quality.
So, where will we head in 2016?
I’ll step way out on a limb here and say that I think the Fed will feel compelled to raise rates one or two times in 2016. I think they’ll do this under political and perceived pressure. I think these actions and others occurring overseas will send the U.S. back into recession or at least into significantly slower growth. At that point, maybe towards then end of the year, the Fed will reconsider and lower rates.
Should this scenario play itself out, the U.S. dollar will start to slide again and the two-year period of strength will end.