“2015 Year in Review – Looking Ahead to 2016”
Ty J. Young Editorial
2015 had BIG stories with a big impact on the markets and on your money. As the New Year approaches, what can we expect in 2016?
2015 in Review
I. China’s Market Meltdown
1. Dropped their rates: In an effort to stop their massive market sell-off, China lowered interest rates.
2. Currency devalued: The Communist Party stepped in to try and stabilize the economic meltdown with an artificial currency devaluation. Instead, it destabilized markets further as global investors (which means American investors) finally began to realize that the Chinese market does not trade as freely as they hoped.
3. Affected the American Stock Market: At the time of this writing, the Dow was down about 300 points for the year. Whether it finishes up or down, it had major losses in August directly related to the Chinese market collapse.
II. Commodity Collapse (A leading indicator of economic performance)
1. Commodity pricing dropped 34%: The S&P GSCI (Goldman Sachs Commodity Index) dropped 34% this year. This measures all of the commodity pricing globally (gold, iron, ore, timber, oil, natural gas, copper, etc.). The index was down 80% from its peak, and reached its lowest reading since 1999.
2. Oil prices collapsed: Oil led the drop in commodity prices with a historic decline. Oil has gone from $98 to $35 so far in 2015. Oil is usually a leading indicator of where the stock market could be heading. A massive increase in production, thanks to American entrepreneurship and in spite of the government, helped drive prices down globally. This had a positive impact for consumers, with gas dropping below $2 a gallon! Still, sustained lower prices usually mean negative headwinds for the markets.
3. Lower demand, slowing growth: A drop in the price of commodities can have many factors. A drop in most commodities, across the board and over a sustained period of time, usually means economies are slowing or contracting.
III. The Fed raises rates
1. The end of ZIRP (Zero Interest Rate Policy): Surprisingly, and in the most limited way, the Fed raised interest rates off of zero, raising the benchmark rate by a quarter point.
2. Strengthens dollar: The dollar was already strengthening against other currencies globally. Raising interest rates will have an even greater effect, compounding the strengthening effect on our currency.
3. Signals belief in U.S. economy: Although it seems the Fed made this move more so from public pressure than their actual belief in the U.S. economy, it does have the effect of showing that we are finally past the crisis strategy of 2008. No one knows what will happen when all of the liquidity from the Fed’s actions are deployed into the economy, since we have never tried such an “easy money” experiment before. Raising rates had to happen eventually, and doing so helps us return to a more free market-driven rate policy.
I. China will remain “the elephant in the room.”
1. Chinese growth is slowing: Regardless of what the Chinese propaganda purports, all indicators suggest the Chinese economy will most likely continue to slow.
2. Slowing growth bad for emerging economies: Without China to buy their oil, or timber, or copper, many emerging economies will begin to slow or fall into recession. This will likely have a domino effect.
3. Drag on U.S. stocks: U.S. companies tied to China or global trade, which is a lot of U.S. companies, could see a drop in their bottom line. This means a lower stock price as we saw in August 2015.
II. Worldwide recession?
1. Commodity deflation: The collapse in oil, copper and other commodities listed above has signaled we are in deflation. The significant drop in demand means very simply people do not have the money to buy things.
2. Currency devaluation: Another signal – central banks in major economies have been lowering the value of their currencies (to make their economies more competitive).
3. Slowing global growth. Slowing commodity demand dramatically affects producers, such as oil kingdoms in the Middle East, Russian oil exports, copper and other commodities in emerging economies like Brazil. Everyone seems to be facing a lack of demand, in many cases over-supply, and only one policy response of devaluing the currency. Those are very strong signals of a recessionary environment.
III. Will the Fed hike rates?
1. YES they will: If U.S. growth remains at 2% or higher, despite how anemic the number is, the Federal Reserve has clearly sent the signal they are prepared to return to normal policy making regarding interest rates. This is a positive development. You could see several small rate hikes over the course of the year.
2. NO they won’t: Growth below 2%, and rate hikes could stop. It would not be surprising to see additional QE (Quantitative Easing) if we have 2 quarters or more below 2% growth. Former Fed Chair Ben Bernanke has even suggested they may use negative interest rates to fight off the next crisis. We believe that’s a bad idea.
There is so much that can be discussed regarding 2015, and so much to look forward to as 2016 approaches. Technology has made more and more of the world’s events available for us to hear and read about each day on phones, tablets, TVs, etc. Despite the headlines, there are a lot of positives out there. Positives occur in your everyday life, in your personal interactions and with your retirement and savings portfolio as well!
The beauty of the products we use for our clients is that global events like the ones listed above can play a much lesser role in your decision making. You do not have to time the market. When the market goes down, you don’t lose anything. When the market goes up, you participate in those gains. You may not be “as right” as your friend in the performance of your portfolio. But you will not be wrong because you won’t lose money when your friend sustains a market loss.
Call us now to find out how you can best shield your retirement money from the global volatility we have seen every year and will inevitably see in 2016! 877-912-1919
( http://www.nbcnews.com/business/energy/too-much-energy-if-it-burns-its-selling-fire-sale-n403801 )
( http://www.marketwatch.com/story/bernanke-says-fed-likely-to-add-negative-rates-to-recession-fighting-toolkit-2015-12-15?dist=afterbell )