Investors need to buckle up for 2016
The herky-jerky GPS route we took on Wall Street in 2015 has investors wondering just what's next to throw us off course.
One minute in late August, we're grimacing as the Dow Jones industrial average drops 588 points in one day to trade well below 16,000. Seemingly the next minute by early November, investors end up smiling and feeling like they can buy groceries again — and maybe even a new car — as the Dow trades much closer to 18,000.
What's next for our 401(k) plans and college savings plans? Here are three areas to watch ahead:
1) No shock here, the Fed.
The question here, really, isn't when or whether the Federal Reserve's policy committee will nudge up interest rates. The next meeting of the Federal Reserve Open Market Committee is Dec. 15 and Dec. 16.
Some say the odds are 50-50 at this point that the Fed will move in December with the first rate hike since the Great Recession drove us to near 0% short-term rates. If not in December, others expect the Fed first could raise rates in perhaps March.
Some market watchers,though, express even more worry about the bumps in the road that the Fed could create by a haphazard communication style. The Fed isn't telegraphing rate hikes as it had in the past. Many had expected a rate hike by September but economic troubles in China changed that scenario.
"Risk No. 1, top of the list, Janet Yellen and the Fed," said Dennis A. Johnson, chief investment officer for Comerica Wealth Management in Dallas.
Johnson, who spoke Wednesday in Ann Arbor before a group of Comerica bankers and clients, said Federal Reserve chairwoman Yellen and the Fed presidents have fueled some of the uncertainty on Wall Street by the lack of clear communication so far.
If the communication is garbled in the future, some experts warn that there could be more volatility for the stock market again.
"Who knows what the Fed is thinking? They certainly aren't communicating well with investors anymore," Johnson said.
What can be reassuring, Johnson said, is that the Fed's delay in raising rates indicates that the Fed will move gradually to edge rates up from the historic lows — and not rattle investors by driving rates up dramatically all at once.
"They can't even put their finger on the button, let alone push it," Johnson said.
Sam Stovall, chief equity strategist for S&P Capital IQ, said much remains unknown on the Fed front.
"The Fed is targeted to begin their rate-tightening program in December, but it’s still a coin toss whether it will happen this year or in the first half of next year," Stovall said.
No. 2: The return of the R-word or recession.
Don't be surprised if you hear more scattered reports about a so-called "impending recession." But it's hard to argue that a U.S. recession is right around the corner when the consumer has been saving money and is not overwhelmed by debt, when housing prices are going up in many areas and when U.S. car and light truck sales hit a breakthrough record pace of 18.24 million in October. Right now, experts say U.S. auto sales post a record for the entire year in 2015.
Yet, economists warn eventually there will be another recession out there.
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"This is not an up, up and away economy," Robert A. Dye, chief economist for Dallas-based Comerica Bank.
Dye said he would expect that auto sales are approaching a "cyclical peak" and could taper off in the future from these record levels. He says Michigan's economy could see slower growth going forward. The manufacturing sector overall is approaching a "stall speed" and is expected to contribute to a slow-to-moderate growth story for the U.S. economy.
Even so, Dye said he'd expect moderate growth in the 2% to 2.5% range for the gross domestic product in 2016. He noted that the 1.5% growth in the third quarter was expected as companies grew more cautious and pulled back on existing inventories instead of adding more goods to store shelves and the like. Part of the third quarter inventory swing was due to the accumulation of crude oil inventories in the first half of this year, Dye said.
Dye said the risks of a U.S. recession are a bit higher than they were a year ago. But he puts the odds for a recession at 15% to 20% in 2016. The risks would grow, he said, if the economy in China proved to be far worse than expected and job growth in the United States weakened significantly.
Stovall noted that declines in stock prices do not always forecast a recession, either. While all 11 recessions since 1948 have been preceded by declines of 10% or more for stocks, there have been 31 such declines, he said.
Standard & Poor's is forecasting U.S. GDP to grow 2.5% in 2015, 2.8% in 2016, and 2.7% in 2017, Stovall said.
No. 3: Manage money — and expectations.
Money managers warn that investors should not expect double-digit gains on their overall investments moving forward, as Fed policy shifts toward higher rates and the risks to global economy remain.
Pockets of the country — say the east coast and the west coast — could end up on a stronger financial footing than parts of the country that are heavily dependent on the industrial sector, Dye said. The coasts benefit significantly from declines in gas prices at the pump, for example, with commuter workforces.
One cautionary signal: U.S. manufacturers grew at a sluggish pace in October for the fourth consecutive month, according to the much-watched ISM Manufacturing Survey. The October index was at a barely-positive level of 50.1%. Readings below 50% indicate that manufacturing is shrinking and economists say such a reading can forecast a recession.
Another potential threat: Outside risks, such as potential troubles in the Middle East or unforeseen events, such as a cyber attack that could destabilize financial markets, says Comerica's Johnson.
So while the Dow is edging back around 18,000 in early November, some market watchers warn that this is not a sign that all systems are go for stocks.
While some buzz can be building for a Santa Claus rally — where stock prices go up in December -- others say don't get too giddy and expect too much.
"The Santa Claus rally might prove to be like snow in Arizona. If it materializes, it might not last. In fact, it may have appeared early, dressed up as a Halloween rally instead," said Robert Bilkie, president of Sigma Investment Counselors in Southfield, Mich.
Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow Susan on Twitter @Tompor.