{"id":28520,"date":"2016-01-08T14:21:19","date_gmt":"2016-01-08T19:21:19","guid":{"rendered":"https:\/\/www.saratoga.com\/saratogabusinessjournal\/2016\/01\/economic-outlook-2016---stephen-kyne.html"},"modified":"2017-11-08T13:46:33","modified_gmt":"2017-11-08T18:46:33","slug":"economic-outlook-2016-stephen-kyne","status":"publish","type":"post","link":"https:\/\/www.saratoga.com\/saratogabusinessjournal\/2016\/01\/economic-outlook-2016-stephen-kyne\/","title":{"rendered":"Economic Outlook 2016 – Stephen Kyne"},"content":{"rendered":"
\n
\"steve\n<\/div>\n
Stephen Kyne, partner, Sterling Manor Financial LLC.\n<\/div>\n<\/div>\n

BY STEPHEN KYNE<\/p>\n

The U.S. stock indices have flipped between positive
\nand negative returns a record 27 times this year.<\/p>\n

The year 2015 was a particularly crazy year. From
\nextreme weather patterns, domestic and foreign
\nterrorism, and a circus of a pending presidential
\nelection (which is only just beginning), to our first
\nhorse racing Triple Crown winner in 37 years (who
\nsuffered his only 2015 defeat in front of many of our
\neyes at Saratoga Race Course), why should the stock
\nmarket have been any more predictable?<\/p>\n

Let’s take a look at how 2015 shook out, and
\nwhere we’re headed in the 2016 economy.<\/p>\n

U.S. GDP grew roughly as expected this year,
\nwith final annual figures increasing between 2.5-3
\npercent. We expect that this relatively slow growth
\nwill continue into 2016. While this is not ideal,
\nand certainly below historical averages, growth is
\ngrowth however you slice it.<\/p>\n


\nAs anyone on Social Security is keenly aware,
\nmeasures of inflation for 2015 have been very low,
\nto non-existent, meaning there has been no increase
\nin benefits going into the new year. Also, as anyone
\non Social Security knows, this is just not true.<\/p>\n

Energy prices have tumbled so dramatically in
\nthe last year that the decrease in energy prices has
\nvastly overshadowed increased costs in other parts
\nof the economy. Rents, for example, have increased
\nover 3 percent, while medical care and food costs
\nhave not been far behind that figure. As energy
\nprices level off, we expect a modest pop in 2016
\nmeasures of inflation to account for these other cost
\nincreases.<\/p>\n

Oil prices have continued to drop well below
\nexpected levels, as Saudi Arabia plays a game of
\n“how low can you go.” We see this strategy on the
\npart of OPEC, but more specifically Saudi Arabia,
\nas being a multi-pronged attempt at global price
\ndisruption for both political and economic reasons.
\nBoth Russia and Iran, neither of which the Saudis
\nare fond of, require relatively higher oil prices in
\norder for their economies to function, because
\nneither has a very diversified economy, and both
\nrely heavily on petroleum exports.<\/p>\n

These effects are especially apparent when
\nconsidering Russia’s current economic recession,
\nas well as its weak currency. As U.S. domestic petroleum
\nproduction was booming in 2013-14, the
\nSaudis sought to disrupt growth here as well, in
\nan attempt to force its rapidly growing, yet highly
\nleveraged American competition out of business.<\/p>\n

For the U.S. consumer and retailers, however,
\nlower fuel prices have been particularly beneficial.
\nAmericans have chosen to spend 72 cents of every
\ndollar we would have previously been spending on
\nfuel. This increased spending has been reflected in
\nimproved corporate earnings and, most recently, in
\npositive year-over-year holiday sales.<\/p>\n

In December of 2015, six months after it had
\nbeen widely expected, the Fed finally began to
\nincrease interest rates. Contrary to some of the
\nconventional wisdom, this has not spelled the end
\nfor the economy. In fact, the Fed sent the market
\ntumbling in the third quarter when it chose not
\nto raise rates.<\/p>\n

Increasing interest rates do not mean the Fed is
\nbeing too tight, just that it had been too loose for
\ntoo long, and is now simply less-loose. Increasing
\ninterest rates should help boost home sales, as those
\nwho had been putting off a purchase, especially the
\nmuch-talked-about millennials, enter the market
\nin order to capitalize on current mortgage rates,
\nbefore they begin to increase as well.<\/p>\n

Rising interest rates should negatively affect
\none asset class in particular, and that is bonds, specifically
\nmany bond funds. As newly issued bonds
\ncarry higher interest rates, the value of previously
\nissued bonds, with relatively lower interest rates,
\nshould decrease. These changes should be reflected
\nin the overall value of the funds that hold them. A
\ndownside of mutual fund investing is that, even
\nthough you may watch your values decrease, any
\ngains the funds may have recognized throughout
\nthe year would be passed on to you.<\/p>\n

In other words, depending on timing, you can
\nlose money and pay capital gains taxes in the same
\ninvestment.<\/p>\n

In 2016 we see a mixed bag for the stock markets
\nat home and abroad.<\/p>\n

In the U.S., 2015 has felt an awful lot like 2011–a
\nyear in which, for all the violent ups and downs,
\nnothing much happened, and markets ended where
\nthey began the year. We believe that U.S. companies
\nare still at, or below, fair value, and the U.S. stock
\nmarkets should appreciate modestly in 2016, with
\nreturn in the 5-7 percent range being expected. The
\nfirst quarter of the year tends to be strong, and we
\nbelieve that 2016 will begin the same way.<\/p>\n

The presidential election is shaping up to be
\nmessy. Will we have an extremely divided electorate,
\nbetween the establishment candidate on the
\nleft, and the anti-establishment candidate on the
\nright (which, remember, is the exact opposite of
\nthe 2008 election). Will the independents say “none
\nof the above”, and hand us someone completely
\nunexpected?<\/p>\n

However the election goes, we can be sure of one
\nthing: doom and gloom prognosticators. The traditional
\nstory line goes like this, “things are terrible,
\nand if you don’t think they’re terrible, they’re going
\nto get terrible, and the only way to save yourself is
\nto elect me.”<\/p>\n

Markets like certainty, and as the election cycle
\nwears on, expect that sectors of the markets will
\nadvance or decline in accordance with the likely
\noutcome of the presidential, and congressional
\nelections.<\/p>\n

If you’ve been thinking about a trip abroad, 2016
\nlooks like a great year. Both the British pound, and
\nthe Euro are extremely cheap in historical context,
\nand will likely remain so for the coming year. The
\nsame goes for South American currencies.<\/p>\n

Much of the European Union continues to be
\nhampered by systemic issues of the last several
\nyears, and now by a refugee crisis sparked by civil
\nwars in the Middle East. We expect no great improvement
\nin European markets in the coming
\nyear, although we don’t expect a pullback either.<\/p>\n

All-in-all, we think 2016 will be a positive year
\nfor the U.S. economy as earnings continue to
\nimprove, unemployment decreases even further,
\ninflation remains in-check, and the Fed remains
\nrelatively loose. Barring the unforeseen, these
\nshould culminate in positive returns for U.S. stock
\nmarkets.<\/p>\n","protected":false},"excerpt":{"rendered":"

Stephen Kyne, partner, Sterling Manor Financial LLC. BY STEPHEN KYNE The U.S. stock indices have flipped between positive and negative returns a record 27 times this year. The year 2015 was a particularly crazy year. 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