Investor Worries Carry Over to the New Year

January 4, 2016Economic Conditionsby EW News Desk Team

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As trading begins in 2016, investors fret over the trends in oil and equities that dominated the last two years.  U.S. equities ended 2015 with a 2.15 percent loss, as measured by the S&P 500 excluding dividends.

Both large cap stocks and small cap stocks underperformed the broader market, with the Dow Jones Industrial Average ending down 3.43 percent and the Russell 2000 losing 6.57 percent in 2015.

Some analysts find themselves scratching their heads, asking where the money went. While equities suffered mild losses in 2015, other asset classes did much worse. Gold plummeted in 2015, losing 11.6 percent of its value and consistently breaking through floor resistance levels that technical analysts insistent signaled a bottom in the precious metal.

On the other side of the risk spectrum, long-term U.S. Treasuries also suffered declines, losing about 3 percent throughout 2015. Corporate debt suffered much worse, with high-yield bonds losing about 10 percent of their value in 2015.

Much of these declines trace back to a general deleveraging in the financial markets that will prove a closer focus in 2016. With fewer investors borrowing money to invest in assets, selling pressure has brought these assets down, but further declines remain possible as more sell-offs could happen throughout 2016.

Oil Crash, Rising Rates

Meanwhile, equity markets have become increasingly skittish thanks to a decline in purchasing activity that economists struggle to explain.

Pointing to a decline in oil prices, economists in 2014 confidently asserted that consumer spending would accelerate sharply as savings at the pump and on energy bills translated into greater consumption of manufactured goods, consumables, and general services. The real rate of GDP growth did not accelerate in 2015, and consumer confidence remained weak throughout much of 2015.

However, in December, consumer confidence showed signs of strength, with the Conference Board announcing that its consumer confidence index rose to 96.5 in December, up sharply from 90.4 in November, originally seen as an indicator of a stuttering economy.

Oil remains severely depressed, with oil prices down about 26 percent in 2015 and over 65 percent down from its pre-crash peak in 2014. This has caused inflation rates to stutter, but did not stop the Federal Reserve from raising interest rates in December on the argument that several soft indicators showed overall strength in the U.S. economy.

2016 Themes

Economists already predict two major themes for 2016.

The first lay in the FOMC rate decisions, with interest rate hikes likely to come two or three times in the year. This increase in interest rates, which will make borrowing more difficult and expensive for governments, companies, and individuals, could cause GDP growth to slow and reverse much of the progress seen since the 2009 Global Financial Crisis.

Additionally, economists foresee high default rates for corporate debts, which began to rise even before borrowing costs went up. According to Moody’s, a credit rating firm, defaults rose to over 3 percent for high-yield debt by the end of 2015, and many analysts expect those default rates to rise even further in 2016.

Higher defaults, combined with slow growth and higher borrowing costs, could result in a perfect storm of recessionary headwinds to the economy next year.