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Home  »  Economic Outlook 2016  »  Economic Outlook 2016 – Stephen Kyne
Economic Outlook 2016

Economic Outlook 2016 – Stephen Kyne

Posted onJanuary 8, 2016November 8, 2017
steve kyne c.jpg
Stephen Kyne, partner, Sterling Manor Financial LLC.

BY STEPHEN KYNE

The U.S. stock indices have flipped between positive
and negative returns a record 27 times this year.

The year 2015 was a particularly crazy year. From
extreme weather patterns, domestic and foreign
terrorism, and a circus of a pending presidential
election (which is only just beginning), to our first
horse racing Triple Crown winner in 37 years (who
suffered his only 2015 defeat in front of many of our
eyes at Saratoga Race Course), why should the stock
market have been any more predictable?

Let’s take a look at how 2015 shook out, and
where we’re headed in the 2016 economy.

U.S. GDP grew roughly as expected this year,
with final annual figures increasing between 2.5-3
percent. We expect that this relatively slow growth
will continue into 2016. While this is not ideal,
and certainly below historical averages, growth is
growth however you slice it.


As anyone on Social Security is keenly aware,
measures of inflation for 2015 have been very low,
to non-existent, meaning there has been no increase
in benefits going into the new year. Also, as anyone
on Social Security knows, this is just not true.

Energy prices have tumbled so dramatically in
the last year that the decrease in energy prices has
vastly overshadowed increased costs in other parts
of the economy. Rents, for example, have increased
over 3 percent, while medical care and food costs
have not been far behind that figure. As energy
prices level off, we expect a modest pop in 2016
measures of inflation to account for these other cost
increases.

Oil prices have continued to drop well below
expected levels, as Saudi Arabia plays a game of
“how low can you go.” We see this strategy on the
part of OPEC, but more specifically Saudi Arabia,
as being a multi-pronged attempt at global price
disruption for both political and economic reasons.
Both Russia and Iran, neither of which the Saudis
are fond of, require relatively higher oil prices in
order for their economies to function, because
neither has a very diversified economy, and both
rely heavily on petroleum exports.

These effects are especially apparent when
considering Russia’s current economic recession,
as well as its weak currency. As U.S. domestic petroleum
production was booming in 2013-14, the
Saudis sought to disrupt growth here as well, in
an attempt to force its rapidly growing, yet highly
leveraged American competition out of business.

For the U.S. consumer and retailers, however,
lower fuel prices have been particularly beneficial.
Americans have chosen to spend 72 cents of every
dollar we would have previously been spending on
fuel. This increased spending has been reflected in
improved corporate earnings and, most recently, in
positive year-over-year holiday sales.

In December of 2015, six months after it had
been widely expected, the Fed finally began to
increase interest rates. Contrary to some of the
conventional wisdom, this has not spelled the end
for the economy. In fact, the Fed sent the market
tumbling in the third quarter when it chose not
to raise rates.

Increasing interest rates do not mean the Fed is
being too tight, just that it had been too loose for
too long, and is now simply less-loose. Increasing
interest rates should help boost home sales, as those
who had been putting off a purchase, especially the
much-talked-about millennials, enter the market
in order to capitalize on current mortgage rates,
before they begin to increase as well.

Rising interest rates should negatively affect
one asset class in particular, and that is bonds, specifically
many bond funds. As newly issued bonds
carry higher interest rates, the value of previously
issued bonds, with relatively lower interest rates,
should decrease. These changes should be reflected
in the overall value of the funds that hold them. A
downside of mutual fund investing is that, even
though you may watch your values decrease, any
gains the funds may have recognized throughout
the year would be passed on to you.

In other words, depending on timing, you can
lose money and pay capital gains taxes in the same
investment.

In 2016 we see a mixed bag for the stock markets
at home and abroad.

In the U.S., 2015 has felt an awful lot like 2011–a
year in which, for all the violent ups and downs,
nothing much happened, and markets ended where
they began the year. We believe that U.S. companies
are still at, or below, fair value, and the U.S. stock
markets should appreciate modestly in 2016, with
return in the 5-7 percent range being expected. The
first quarter of the year tends to be strong, and we
believe that 2016 will begin the same way.

The presidential election is shaping up to be
messy. Will we have an extremely divided electorate,
between the establishment candidate on the
left, and the anti-establishment candidate on the
right (which, remember, is the exact opposite of
the 2008 election). Will the independents say “none
of the above”, and hand us someone completely
unexpected?

However the election goes, we can be sure of one
thing: doom and gloom prognosticators. The traditional
story line goes like this, “things are terrible,
and if you don’t think they’re terrible, they’re going
to get terrible, and the only way to save yourself is
to elect me.”

Markets like certainty, and as the election cycle
wears on, expect that sectors of the markets will
advance or decline in accordance with the likely
outcome of the presidential, and congressional
elections.

If you’ve been thinking about a trip abroad, 2016
looks like a great year. Both the British pound, and
the Euro are extremely cheap in historical context,
and will likely remain so for the coming year. The
same goes for South American currencies.

Much of the European Union continues to be
hampered by systemic issues of the last several
years, and now by a refugee crisis sparked by civil
wars in the Middle East. We expect no great improvement
in European markets in the coming
year, although we don’t expect a pullback either.

All-in-all, we think 2016 will be a positive year
for the U.S. economy as earnings continue to
improve, unemployment decreases even further,
inflation remains in-check, and the Fed remains
relatively loose. Barring the unforeseen, these
should culminate in positive returns for U.S. stock
markets.

Previous Article Economic Outlook 2016 – Mark Shaw
Next Article Economic Outlook 2016 – Barry Potoker
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