2016 Predictions: Stocks To Drop, No Recession, Fed To Stop Hiking

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One of the best parts of the new year is that it’s a resetting of the deck. Last year’s problems are put aside, and we can look ahead with fresh eyes. For investors heavily exposed to such problem areas as oil stocks, it’s a welcome opportunity indeed.

Here, we’ll be moving our perspective into 2016, offering predictions for the upcoming year. We’ll start with broad economic and financial predictions, followed by takes on some individual stocks, and finally a glance into the crystal ball regarding the year’s political and geopolitical developments. First up, the economy.

Oil Won’t Recover This Year, Look For A $25-$30/Barrel Low

Perhaps last year’s top story, the energy sector will see no miracle this year. However, we’re well into the worst of the trough. 2016 is unlikely to deliver as much pain as last year.

Natural gas has already, it would appear, bottomed, with prices up almost 40% since the December low. Cooler weather, the start of global exports, and a slowing supply picture should support that fuel over the course of the year.

Oil, on the other hand, has less going for it. There’s no weather bid coming to shore up its fortunes like natural gas. Global supply growth was starting to taper off, but the imminent return of large-scale Iranian production this year will delay a more balanced oil supply/demand picture until 2017.

On the demand side, weakness in emerging economies, led by slowing China and collapsing Brazil will keep a lid on any potential oil recoveries. In the developed economies, lower prices may drive strong demand, but the strong current focus on the environment and green fuels will slow readoption of more petroleum despite the lower cost.

For oil bulls, 2017 is a better bet for a sustained return to prices above $50/barrel.

The Fed’s Rate Hike “Campaign” Will End

Current projections show the Fed hiking interest rates three of four times in 2016, along with more hikes in 2017. This won’t happen. You can bank on it.

The global economy is much too weak to endure a sharply rising interest rate scene in the US. The Fed felt a great pressure to hike so that they could officially end the zero interest rate policy and start to normalize.

But they’ve largely been jawboning, their words being much more important than actions. With inflation muted and US economic growth modest, there’s no reason for rates to be hiked aggressively. The darkhorse prediction is actually that the Fed will be forced back toward easing by the end of the year.

The Economy Will Slow But Not Enter Recession In 2016

With the global economy in the midst of a sharp slowdown, it’s easy to think the slump may spread stateside. The strong US dollar in particular is a huge headwind. S&P 500 earnings were flat for the year, and where there’s no growth, it’s hard to create many new jobs or see the new sorts of capital investment necessary to drive economic expansion.

That said, the US economy is too strong at the moment for the wheels to come off this year. Strong recoveries in the auto and housing sectors in particular are strong drivers of job creation and capital investment. These sectors should be enough to keep the economy from slipping into recession until 2017.

The Stock Market Will Make New Highs Early In 2016 Before Fading

The S&P 500 has been trading in a 10% range for more than a year now. Every time we hit 2,100, stocks immediately tumble back to 2,000 and then slowly climb back to 2,100 again. This cycle should break this spring, as bulls finally get the long-awaited thrust to new highs.

Their joy will be short-lived, however, as the mounting global problems keep earnings capped and slow the trajectory of the US economy. A sudden selloff, perhaps driven by Petrobras’ upcoming bankruptcy, a Chinese credit crunch, or overly aggressive Fed policy will cause a sharp drop similar to the August 2015 decline.

Unlike that decline, this one will continue, perhaps even reaching the 20% level technically necessary to end the 2009-to date bull market. For the full year, look for US stocks to be off 8 to 15%. This will be a good year to have some of your investment dollars in foreign stocks.

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