Will 2016 be better? In many ways, yes
Interesting is a kind description of 2015 from an investment perspective. The equity markets started out moving to all-time highs across the board (major indexes along with the broader market of over 8,000 stocks) in the spring before stagnating and turning volatile for the remainder of the year.
The market has been pulled up by fundamentals and a few glamour stocks while it has been pulled down by indecision, missed sales estimates, and falling average profits due to cheap energy prices, a strong US dollar and a soft global economy.
Through it all, our continued moderate growth has made the U.S. economy a relative strong performer compared to the developed and emerging economies around the world. This is a testament to the hard working entrepreneurial spirit that has always exemplified America, but it has not been without challenges.
It is readily apparent that since the Great Recession, Wall Street has been favored greatly over Main Street. The Competitive Enterprise Institute has noted that just since the recession ended the federal regulatory environment has seen 895 new bills signed into law while federal regulators alone have added 24,478 new rules. Larger companies with in house legal departments can more readily absorb these costs and pass them on to consumers than small business can.
Cheap money has benefitted public companies that can refinance and borrow in the public debt markets and private equity firms that can raise money from accredited investors flush with profits from a long bull market by offering relatively good returns while regulations and a tough sales environment dictated by prudent consumers have hindered credit and loans for small businesses while increasing an already challenging growth environment for all businesses.
US GDP growth was enhanced in the second and third quarter with over $60 Billion in increased inventories. American manufacturers of items like electronics, chemicals, and heavy machinery saw a strong contraction of business in the 3rd quarter.
Now for the good news heading into 2016. The inventory situation will work itself out over time. The November ISM service sector (which employs over 80 percent of U.S. workers) index while down slightly to 55.9 is still indicating growth.
Employment growth in the US remains solid and the unemployment rate of 5 percent will most likely decline to the low 4's throughout 2016 and the labor force participation rate which ticked up .1 percent should also increase as more people enter the workforce and find jobs. Wages were up around 2 percent in 2015 and as competition for good employees increases so will wages.
Consumers have been on a buying binge for new cars the past couple of years with annual sales of over 18mm units for 2015. This should slow in 2015 as the consumer can turn to purchasing other items with increased employment and wages. Housing, also, continues to rebound.
The Fed is planning on raising rates around 4 times over the next 12 months. Historical rate hikes have indicated less liquidity, but this time it appears that the rate hikes will actually help liquidity as with higher rates the banks will start to lend more money. There is still over $2.5 Trillion in excess reserves held by banks at the Fed. This is after a reduction of some $60 Billion recently. This increases the Money Supply (M2) and has halted the decline in the Velocity of Money (M2) in our economy since the recession.
The lull in average corporate profits due mainly to the high dollar and cheap energy should dissipate in early 2016 as business sales and profits increase on a comparative basis. This along with the gradual strengthening of the Euro area economies should drive both US and European stocks up in 2016.
Geopolitics aside, it should be a better 2016.
• Bob Gray is a retired partner of an independent northwest suburban wealth management firm.He speaks on global economic and market conditions.