While running around like Chicken Little and proclaiming the sky is falling sounds like fun, I'd rather take a more modest approach to what I think is going to happen to the world in 2016.
We Reach Full Employment -- Finally
An unemployment rate around 4.6% will be attained mid-year and signify that the economy has reached full employment. Equity markets will not handle this well. The August monthly job report will create fewer than 100,000 jobs (bold prediction, right?), and equity traders will run for the hills. This is because not everyone will believe we are in full employment. While full employment sounds good on paper, with a market trading at 22x earnings and low jobs creation, the door will open for smart money to cash out and volatility to cash in.
Inflation Reaches the Economy
With full employment in effect, employers that want to hire or add will need to get more aggressive. In a "hard" market for employees, the best way to hire is to increase wages. This increase in costs by companies will need to be passed along to the consumers, and it will be in the form of higher prices. I'm not calling for runaway inflation, but core CPI will see a 3% headline year over year sometime in 2016.
Energy Creates Mild Geopolitical Problems -- and Foreign Exchange?
Energy prices will remain low through at least the first half of 2016. OPEC countries that believe in production limits may get cantankerous with countries like Saudi Arabia, whIch believes the cartel should continue a liberal production output. Saudi Arabia's foreign reserves situation also will get the eye of more than a few astute investors and economists in 2016. After burning nearly 15% of their foreign reserves in 2015, attention will turn from China to the real foreign currency threat.
Earnings Performances Will Improve Modestly Over Time
Despite what's happened since August, I believe that a stronger dollar will trump international weakness in the intermediate term (prior to the next recession). Retail earnings in February for 2015 will provide slightly better-than-expected results. Companies in the S&P 500 will beat earnings expectations 63%, 65%, 68% and 65% of the time in each of the quarterly earnings, respectively.
Intentionally Left Out of the Conversation: The Fed, GDP and Donald Trump
I am weary of predicting when the Fed will raise rates, but I will quickly mention that I believe there will be a "pause" in rates for at least two meetings in 2016. We'll look back and say the Fed missed it again, but not until at least late 2017.
GDP has become a fickle statistic. A good winter can send growth in the red temporarily, only to rebound in the second and third quarters. None of this describes the health of the economy, thus the relevance of GDP has become irrelevant. And while Donald Trump is left out, I predict he'll say something controversial in 2016.
I wish everyone a happy and healthy 2016!