Crystal-Ball.gifMarket predictions 2016. As the year turns once again, many now are turning to a review of the past year, but more importantly, try to know where we are going in the future. So at Blue Point Trading we put together a list of ideas of what we could see for 2016. First, let’s review what we said last year at this time and see if we are right. Click here for the 2015 predictions.

The results of the 2015 predictions followed pretty much with our theme of stagnation and a deflationary environment. Mostly flat on most asset classes. One notable miss we had was in commodities. The commodity rout has taken a lot of folks off guard. This was driven by the poor economic growth/demand and the over-supply conditions, though much of the decline specifically in Oil was due to OPEC and US manipulations in global supply. This has bleed through to the entire commodity complex, as well into other asset classes.

The 2015 market predictions results (click here and here to see where this an more economic YTD data can be found):

  • Prediction: Equities to finish flat to up 5%. Actual results: Largely in line at -0.73%.
  • Prediction: Bonds to finish down 5%. Actual results: Slightly too bearish at: Investment grade +0.10%, Bond index -0.05%, and internationalBonds -8.91%. Bonds have stayed more elevated than expected, due to the Dollar strength and the safe haven play. However, lower quality credit (international) did experience this bearishness.
  • Prediction: The Dollar could remain flat. Actual results: Slightly bearish at +8.1%. The commodity rout has put upward pressure on the Dollar. We thought the run up in Dollar late 2014 would cool off – it went farther than expected.
  • Prediction: Commodities flat to up 5%. Actual results: A miss at -25.32%. A miss. See comments in the opening statement.
  • Prediction: Real US GDP to average 2.5% to 3.5%. Actual results: Largely in line at +2.1%.
  • Prediction: Corporate earnings (profit after tax) look to improve again around 5% to 7%. Actual results: Slightly too bullish at +1.1%, though raw coporate profits were down -1.6%. Financial engineering has kept the earnings per share up.

Key 2016 themes and risks:

At the start of 2016, the big question on everyone’s minds is the direction of the US and global economy. Is the global economy going into a recession or worse, a deep crash? I get the impression when I speak of wealth inequality, people think it is just left wing political yammering. Many pundits just dismiss this kind of talk. It is not a political issue, it is called mathematics. Under Obama the money supply has more than doubled. Divided by heads of households in the US, this is nearly $200K each. Did you get your $200K? And it did not cause much inflation nor much growth. Where did the money go? It was the simple mathematics of leverage via the fractional reserve lending of banks, engineered by central banks. The money went to the top tier wealthy people in hope of trickle down economics. The rich can leverage and the poor can not. It is not working. Why?

What this increase of money supply (i.e. credit, as new money is credit) has done, is to create more debt that the masses will have to pay for somehow. Whether it be in more taxes, less government services in the case of sovereign credit (you chose left or right wing politics, the results are the same). Or in the case of private debt, higher prices and/or more volume of purchases. But none of this can happen because the people on the bottom do not have more money to sustain this debt bubble. It is central bank economic distortions. And remember, this central bank distortion is a global phenomenon not just in the US.

Hence, central banks can not raise interest rates much, or it will just make the situation worse, though they may try to give the appearance all is well. In addition, like a drug addict, it takes ever increasing amounts of stimulus to have the same effect. So what will happen? Central banks will try to keep it going for as long as they can, until the economies of the world hit the Minsky Moment. But remember as well, this phenomenon can go longer than you think, after all Japan has been keeping it going for nearly 20 years.

So the best case scenario is that the economy stagnates or drifts lower, though asset prices can stay elevated, as the wealthy have nothing else to do with all that money but buy. If a “Black Swan” event occurs (which may even be unrelated to this phenomenon), a significant crash can occur. Now I do not want to wallow in “pessimism porn,” or get political, let’s just stick with the mathematical facts of the situation. Whether 2016 is the year of the next big crash is hard to say. We do need to be very watchful as the time is drawing closer.

Other specifics for 2016:

  • Geopolitically the situation could momentarily improve for 2016. Most world powers are coalescing around the goal to defeat ISIS, the group that has consumed so much attention in 2015. This from a geographic perspective could happen. Causing many of the powers to raise their hands and declare victory. That being said, the Middle East and home-grown terrorists will continue to flourish, just more in the shadows within the developed world and distant failed states. This means perhaps more terrorist attacks not less. The terrorist are mostly driven by economics, as they flounder in despot dictatorships, often created by the West, that hold them captive. Increased spying and monitoring of the world citizenry via electronic surveillance will be the order of the day, as the citizenry slowly lose their independent rights and privacy. Of course there is always the outside risk, that a geopolitical policy miscalculation would occur, causing the unthinkable. This unthinkable risk, though small, seems to be growing with each passing year.
  • Politically in the US, the focus will be on the US presidential elections. Obama will spend his last year in office, pruning his legacy and not taking any risks. Expect no major agenda issues to come forth out of the US. So who will be elected as US president in 2016? On the right (GOP), the field is weak and almost all the currently proposed candidates are unelectable – yes, even Donald Trump. The only one that could beat any of the current center-left wing candidates (Democrats) would be John Kasich. But, his performance in the recent debates has been poor and looks doubtful. On the Democratic side, barring any scandal or major missteps, it will be Hillary Clinton. She has to be the clear favorite to win, in the general election as well. Her election will bring even more political divisiveness than Obama did. The Clinton election will be a continuation of the Obama legacy in terms of foreign and economic policy. If this outlined scenario does not occur, this presents significant risk to the markets and could cause considerable negativity and volatility.
  • Europe will continue to be a basket case. In fact, it could get worse. Europe will become more nationalistic, seeking separations and raising borders. The citizenry will flip to and fro. Those who have left wing governments will move right. Those with right wing governments will move left, as the citizenry searches for solutions. Governments, will continually tighten their belts and try to stimulate via trickle down economics. All causing huge potential social unrest. Nothing will work and it will slowly edge down. However, assets in large companies may in fact, do better than in the US, as the money flow of the wealthy continues upward into a crowded safe asset bubble trade.
  • Asia could be the region to watch in 2016. As said before, the develop economies simply do not have the money to buy the products in the volumes as they have done before. So more emerging market distress is to come. They will have to rely on internal consumption, which will be insufficient to maintain growth levels as before. Again, at best, stagnation and slow downward pressure in the Asian region. Whether governments turn to geopolitical issues to distract its citizenry that have growing expectations, is yet another “Black Swan” event one must watch out for.
  • Once again, central bank policy will be the major market driver, along with the search for a bottom in commodity prices (which may occur in 2016, but then stay low). More central bank stimulus will be the policy of most global central banks. The Fed, being in the best position, may raise rates one or two more times, but not much more – the market is far too optimistic on this point. The BOE, JOB, BOC and ECB will continue their QE/stimulus policies to little avail. This stimulus may accelerate if recession ensues and commodity credit risk forces central bank bailouts. The Dollar will be the winner, as it will be the least dirty of the bunch. Stagnation and deflation will still be the themes at play, as the world economies have a mountain of debt to work off that could take years.
  • The one bright spot has been US employment, though most of the employment gains has been in temporary lower paying jobs. Participation rates remain low as well. It will help the US in 2016 compared to other areas of the world, but will be insufficient to support the global economy. Blowback from the strong dollar and weak business investments will begin to slow down this advantage in the US throughout 2016.
  • Last year I asked the question, “Will the people rise up?” – in a “Black Swan” event to demand a revolution? If no major economic crash occurs, the answer to this is, no. People will be too afraid, both economically and from a terrorism perspective, to upset the current status quo, even if conditions are not that good. For any major Western country protests to occur, things have to get much worse. If this should happen, then we would have to reconsider and examine this point.

The 2016 market predictions:

  • Equities to finish flat. The first half of the year we could see a good -5% to -15% sell off, and then coming back toward the back half of 2015. The “nothing else to invest in” scenario of the wealthy will keep PE ratios from falling too much, even though with the stagnate growth it should.
  • Bonds to finish flat. Now that the Fed has started a rate raise cycle they could extend this one or two more times, putting some downward pressure on Bonds. But look for more credit risk in poor quality credit markets.
  • The Dollar could go higher, flat to +5%. There is central bank divergence, where the Fed is hiking rates and other global central banks are still in stimulus mode. As well, the US economy may do better than other developed economies. This will keep the advantage to the King Dollar trade.
  • Specific commodity and currency pairs: Bullish: USJPY, NZDUSD, USDCHF and AUDUSD. Bearish: EURUSD. Flat: USDCAD and GBPUSD. Gold and Oil could be ready for a slight bullish run, off the 2016 lows when made.
  • Commodities flat to up +5%. Can they go much lower from the start of 2016? I suspect not, though we are not looking for any “V” bottom recovery. Perhaps a bounce off the 2016 bottom created and then stagnate from there.
  • Real US GDP to average +1.5% to +2.5%. Stagnation and deflation are again the themes for 2016. Global growth could be just slightly better when adding in emerging markets, though again, a little less than in 2015. So slow anemic growth, perhaps just a little worse than in 2015, barring any catastrophe.
  • Corporate earnings (profit after tax) look to stagnate again around 0% to +3%, reflecting the upward pressure of central bank liquidity. With M&A, stock buybacks and the financial engineering of a lot of corporate CFOs, they will manage to keep their earnings from slipping too far down, though again barring any catastrophe. Remember, ultimately earnings drive equity prices.

Here is a potpourri of links to other predictions and YTD interesting chart data (if you find more interesting links, please put them in the comments section of this Blog post):

  • Bloomberg’s best and worst of 2015 – click here.
  • 7 things that could go horribly wrong in 2016 – click here.
  • Year in money 2015 – click here.
  • A Decade of ‘tech’tonic shifts – click here.
  • Fortune’s predictions 2016 – click here.
  • In 2015 I learned that… – click here.
  • Here are the best charts about the markets and economy we saw in 2015 – click here.
  • Nine market forecasters make predictions for 2016 – click here.
  • Here are the S&P 500’s 10 biggest winners and 10 biggest losers of 2015 – click here.
  • Barron’s stock market outlook 2016 – click here.
  • The latest “PunchLine” economic chartporn – click here.
  • Forbes’ top 10 predictions for 2016 – click here.
  • Zero Hedge’s US economy – a 2015 year-end overview – click here.
  • The Guardian’s: What will happen in 2016? – click here.
  • Tread lightly 2016 technical outlook – click here.
  • A Year of living technically: Charting the markets of 2015 – click here.
  • 7 market predictions for 2016: Gold, Energy, Stocks, Bitcoin – click here.
  • Here’s what Wall Street is predicting for the stock market in 2016 – click here.
  • Aljazeera: Ten predictions for 2016 – click here.
  • NBC’s Richard Engel offers 10 predictions for 2016 – click here.
  • Investopedia: 6 Factors that point to global recession in 2016 – click here.
  • Wall Street Journal: What to expect in 2016 – click here.
  • 5 “Kitchen Table Economics” predictions for 2016 – click here.
  • Biblical Apocolapse time line 2016 (Oh dear …) – click here.
  • New Bible codes point to the destruction of ISIS by 2016 – click here.
  • Psychic and Astrology world predictions for 2016 – click here.
  • 2016 Horoscope – click here.

We shall see if 2016 will become the year of big change in the current 7-year business cycle. One thing is for sure, volatility will keep all the traders active on a day to day basis. It looks to be another good year for the trader – as volatility is all we need. Good luck in your trading in 2016.

Learn more on this, review of the news headlines, technical analysis and more on your daily YouTube Blue Point Trading Morning Call. Click here, or watch below.

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Blue Point Trading 2016 Market Predictions

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