The big money questions for 2016
The year started out on a sour note for investors, with both the Dow and the S&P 500 seeing their worst first weeks ever. What does the rest of 2016 hold? Here are the six big questions that loom.
Will Chinese growth accelerate? The cause of the New Year’s sell-off was anxiety over a slowdown in China (sometimes referred to as a “hard landing”), which sent stocks there plummeting roughly 10 percent over the first five days of the year. This is not a new fear — investors have believed that a downshift in growth in the world’s second largest economy would inflict pain on the rest of the world, especially as China shifts from an economy that relies on government investment in building and infrastructure as well as manufacturing to one that is more consumerbased.
How many Fed rate increases can we expect? The central bank pledged to raise rates gradually; according to its own projections, there are likely to be four quarter-point increases in 2016. But the bond market thinks that there will only be two, due to slower growth. If the Fed is correct, it would mean that U.S. growth continues to accelerate and that inflation will rise toward the target 2 percent; if the bond market is correct, growth and inflation will likely stall in 2016.
Whither crude oil prices? Oil’s slide (down about 25 percent in the first three weeks of the year), comes after last year’s 30 percent drop and 2014’s 46 percent plunge. With Chinese demand cooling and supply remaining high, the world is using 1 million barrels of oil less than it is producing. That’s pushing prices down. That’s good news for consumers, who will either save or spend the savings at the pumps, but bad news for energy companies.
Will U.S. economic growth accelerate? GDP growth last year is likely to come in around 2.25 percent, matching the results of the previous three years. Analysts are expecting growth of 2.6 percent in 2016, with just a few thinking that a recession is imminent. Part of the answer to this question may also be found in the movement of the U.S. dollar, which in trade-weighted terms is at a 10-year high. With anxiety in China and emerging markets pushing capital to the U.S., the dollar could continue to rise, which would be bad news for U.S. manufacturers and likely keep inflation too low in the eyes of the Fed.
Will wages finally rise? The economy added 2.65 million jobs in 2015, the second best year for job creation in the past 15 years. (The best was 2014). While there was progress on job creation and the unemployment rate (5 percent), wage growth has lagged. With a tightening labor market, employers may have to dig deep and pay up to attract and retain qualified talent.
Will the bear emerge? The teetering bull market in U.S. stocks, just shy of 7 years old, has been the third longest in history (19872000 is the winner, followed by 1949-1956). Just because the bull is aging does not mean that it is doomed, but it does mean that the pressure is mounting for companies to deliver earnings growth in a year when their compensation costs are likely to rise and higher interest rates may eat into their margins. By the way, since the end of World War II (1945), there have been 12 full-blown bear markets (with declines of 20 percent or more). Statistically they occur about 1 out of every 3.5 years and last an average of 367 days.
Contact Jill Schlesinger, senior business analyst for CBS News, at askjill@JillonMoney.com.