Allen Sinai, PhD
Allen Sinai, PhD, CEO and chief global economist at Decision Economics, Inc., a financial advisory firm based in Boston and New York City. He has been an adviser to several US presidential administrations. DecisionEconomicsInc.com
Can the bull market in stocks roll into an eighth year despite the major challenges confronting global economies?
Top economist Allen Sinai says yes—investors should look past this year’s market volatility and widespread pessimism to see that those challenges won’t trip up the bull market that began in March 2009. He believes that central banks in major foreign countries are prepared to use their formidable powers to do whatever it takes to bolster economic growth…and that the US Federal Reserve will raise interest rates slowly enough to avoid stalling the US economy. But there are pockets of danger that investors should be aware of.
Here’s what Sinai sees for 2016 and beyond—and what it means for your investments…
Forty-eight. That number has weighed heavily on stocks in 2015. It’s the percentage of total revenue that companies in the Standard & Poor’s 500 stock index generate outside the US. It’s also a major reason corporate earnings have been flat in 2015, weighed down by a strong US dollar that hurts exports and by weak demand from major global trading partners. The economies of Japan and European countries have barely grown. And China’s economic growth has dropped to 6.9%, well below its average annual rate of 10.9% since 1989. That’s significant because China’s fortunes impact the economic health of dozens of foreign countries, ranging from South Korea and Japan to Canada and Germany. Despite all this, I think that the chances of a global recession ending the US bull market in 2016 are remote and that the big picture is brighter than most investors realize.
The key: Inflation is extremely low around the world, in large part because of the plunge in global energy prices and technologies that are restraining prices globally, including Internet retailing that allows consumers to compare prices more easily.
Low inflation provides central banks in struggling nations enormous leeway to aggressively ease monetary policy in order to stimulate their economies. For example, China’s central bank has reduced interest rates six times in the past year and will continue to do so in 2016. The Bank of Japan has initiated a massive “quantitative easing” program—buying up government bonds and even stocks to reduce interest rates and stimulate the economy, corporate earnings and the stock market. And the European Central Bank has indicated that it will keep buying 60 billion euros worth of bonds a month through September 2016 and perhaps beyond.
These stimulus measures can take several years to work, but I expect to see good progress in the coming year. My forecast: Japan’s economy is likely to grow by 1.5% in 2016, up from 0.7% this year…the European Union 2.5%, up from 1.5% in 2015…and China 6.5% next year, which would be a decrease from 6.9% in the third quarter of 2015 but a sign that efforts by China to avoid a deeper slowdown in growth are working.
The global economy should grow by 3.5% to 4%, up from growth of about 3% in 2015. While this rate of growth hardly sounds exciting, I think that marginal improvement overseas will be enough to reinvigorate US corporate earnings and the bull market.
That’s because the US economy, outside of manufacturing and exports, is quite sound and will strengthen next year, thanks to a variety of growth-friendly factors ranging from low unemployment to interest rates that will remain very low even as the Federal Reserve starts to raise them.
Here’s what to expect for 2016…
• GDP: Although US gross domestic product, the most widely cited measure of the economy, grew a meager 1.5% in the third quarter of 2015, I see almost no risk of a recession. I expect that overall growth will total about 2.5% for 2015…and 3.1% in 2016. Low gasoline prices will support vigorous consumer spending. Also, rising home prices are making American home owners feel wealthier.
• Unemployment: Job growth will continue to be strong, with the unemployment rate falling to 4.3% by year-end 2016 versus 5% in October 2015. That should help tighten the labor market enough to create improvement in wage growth, which will help support consumer spending and the economy but should not push up inflation substantially.
• Inflation: Inflation as measured by the Consumer Price Index has run far below what anyone would have thought this far into the economic expansion, due in large part to low energy costs. The price of crude oil has fallen 60% in the past 18 months, and I don’t expect the price to rise above $60 per barrel for many years. I expect the inflation rate to be 1.5% for 2016, up from about 0.3% in 2015 but still below the Federal Reserve’s target of 2%. That will allow the Federal Reserve to raise interest rates at a very slow pace.
I expect stocks to do well next year, fueled by corporate earnings, which could increase by 6% to 8%. Despite the long bull market, the S&P 500 is still reasonably valued. Both the Dow Jones Industrial Average and the S&P 500 stock index will likely rise about 9% in 2016, including reinvested dividends. However, somewhere along the way, another 10% market pullback or several smaller dips might occur.
Investors should consider these to be temporary setbacks from which stocks will rebound. Since the mid-1950s, there have been eight cycles of rising interest rates. During each, the S&P 500, on average, did not peak until 30 months after the first Federal Reserve interest rate increase. And the index rose an average of 9.5% in the 12 months following that first interest rate hike.
Best sectors of the stock market for the coming year…
• Consumer discretionary: Strong consumer spending is likely to make this the top-performing sector of the S&P 500, driven by the stocks of Internet retailers and leisure, hospitality and travel companies.
• Information technology: Stocks of companies that provide data networks, software systems and tech-support services likely will outperform the broad stock market as businesses seek ways to spur growth and maximize their profitability.
Stock sectors to avoid for the coming year…
• Utilities and consumer staples (which refers to essential products such as food, beverages and household items): These have already seen a big run-up in their stock prices and offer more limited growth potential.
• Energy companies: These will remain under pressure because of low oil prices.
