Usually on a Monday, I write in these pages about the week ahead. Looking forward a whole week in financial markets and attempting to make predictions is difficult enough, but this being the last Monday of 2015 it is only natural that I will attempt to look forward even further and give some forecasts for 2016.
One year is a very long time in financial markets. Before today’s trading the S&P 500 was up a grand total of 0.1% on the year, but the biggest one-day range, back on August 24th, when the market was collapsing, was 4.98%. When looking long term, it is important to remember that, while short term trends can result in significant volatility, the tendency of market prices to return to the mean will usually smooth that out.
The ECB is finally embarking on the QE that was needed in the Euro zone, but will likely find out, as did the Fed, that it takes time for increased liquidity to prompt increased lending by a spooked and heavily regulated banking system. Similarly China’s devaluation of the Yuan has caused ructions and an extension of that policy will presumably do the same, but a lower Yuan will help stimulate their manufacturing based economy at some point.
All of those things contribute to why a weak start to 2016 can be expected, but later in the year the pain of the treatment in all of these cases will fade from view as the focus shifts to the effects of the cure. The oil industry will emerge leaner and meaner, the prospect of deflation will have been defeated in Europe and the Chinese economy, while not returning to double figure growth, will at least be on path for the much written about “soft landing.”
