I am convinced that trouble is coming in 2016 that could poison your returns if you are not careful. Here are 6 possibilities.
By Tony Sagami (mauldineconomics.com)
I expect that 2016 is going to be a very difficult year for the stock market. Why do I say that? For any number of reasons, such as:
Poison #1: The Strong US Dollar
The greenback has been red hot. The US dollar index is up 9% in 2015 after gaining 13% in 2014 and a strong dollar can have a dramatic (negative) impact on the earnings of companies that do a significant amount of business outside of the US—for example, Johnson & Johnson, Ford, Yum Brands, Tiffany’s, Procter & Gamble, and hundreds more.
Poison #2: Depressed Energy Prices
I don’t have to tell you that oil prices have fallen like a rock. That’s a blessing when you stop at a gas station, but the impact on the finances of petro-dependent economies, including certain US states, has been devastating. Plunging energy prices are going to clobber everything from emerging markets to energy stocks, to states like North Dakota and Texas.
Poison #3: Junk Bond Implosion
You may not have noticed because the decline has been orderly, but the junk bond market is on the verge of a total meltdown.
Third Avenue Management unexpectedly halted redemption of its high-yield (junk) Focused Credit Fund. Investors who want their money… tough luck. The investors who placed $789 million in this junk bond fund are now “beneficiaries of the liquidating trust” without any idea of how much they will get back and or even when that money will be returned. Third Avenue admitted that it may take “up to a year” for investors to get their money back. Ouch!
The problem is that the bids of the junkiest part of the junk bond market have collapsed. For example, the bonds of iHeartCommunications and Claire’s Stores have dropped 54% and 55%, respectively, since June!
What the junk bond market is experiencing is a liquidity crunch, the financial equivalent of everybody trying to stampede through a fire exit at the same time. In fact, the International Monetary Fund (IMF) warned that blocking redemptions could lead to an increase in redemption requests at similar funds.
Poison #4: Rising Interest Rates
As expected, the Federal Reserve hiked interest rates at its last meeting. The reaction (so far) hasn’t been too negative; however, we may have several more interest rate hikes coming our way.
Every single one of the 17 Federal Reserve members expects the Fed funds rate to increase by at least 50 bps before the end of 2016, and 10 of the 17 expect rates to rise at least 100 bps higher in the next 12 months. I doubt our already struggling economy could handle those increases.
Poison #5: Government Interference
Sure, 2016 is an election year, which brings uncertainty and possibly turmoil but the Obama administration could shove several changes down America’s throat via executive action—such as a higher minimum wage, limits on drug pricing, gun control, trade sanctions including tariffs, immigration, climate change, and increased business regulation.
I don’t give the Republican-led Congress a free pass either, as I have no faith that it will put the best interests of the U.S. ahead of its desire to fight Obama.
Poison #6: China Contagion
We do indeed live in a small, interconnected world, and it’s quite possible that something outside of the U.S. could send our stock market tumbling.
Middle East challenges notwithstanding, the one external shock I worry the most about is one coming from China. The sudden devaluation of the yuan and the significant easing of monetary policy by the People’s Bank of China are signs that trouble is brewing. However, I think the biggest danger is an explosion of non-performing loans in China. Debt levels in China, both public and private, have exploded, and I continue to hear anecdotal evidence that default and non-performing loans are on the rise.
To be truthful, I have no idea which of the above, or maybe even something completely out of left field, will poison the stock market in 2016, but I am convinced that trouble is coming.
Call me a pessimist, a bear, or an idiot but my personal portfolio and that of my Rational Bear subscribers are prepared to profit from falling stock prices.
The original article was written by Tony Sagami (mauldineconomics.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in top right corner) in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]
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