As the calendar winds down, this past year has proven out to be much to do about nothing. A very long awaited, almost 3 years, hike in Fed interest rates came about with nothing more than a slight raise in the prime. The new normal is certainly running the global economies. That normal is quantitative easing, currency manipulation, central bank liquidity, and Hope that all this will stabilize world markets. There is great Hope that the Fed can normalize interest rates in time to prevent another global financial crisis. It will be very difficult to accomplish if commodity price stay low and the dollar remains high. Increasing domestic interest rates, with a low growth GDP, may cause deflation, therefore lowering values on all asset classes including equities and real estate.
This interest rate increase is on uncharted waters. It is only a Hope that unemployment will fall and GDP will provide stable growth. It is also a Hope that China remains at a growth level above 7%. Many specialist predict that this may not be the case, and using voodoo economics, China is masking an industrial and consumption slowdown.
The biggest Hope involves DEBT. As interest rates rise, companies will use more cash flow to pay interest on highly leveraged balance sheets. Sectors like energy and health care are already feeling the effects and cause a big ripple in the junk bond market. Many public companies are borrowing money to pay dividends to shareholders, this will also be an increased cost in 2016. Stocks with good dividends are attractive to investors when markets are moving sideways and retirement portfolios are seeking yield.
There is another Hope, that is the Hope that we are not in an earnings recession. It will take some time to determine, as many companies are using free cash to do stock buy-backs. This process will increase earnings per share, but it is hard to sustain if cash dries up.
We can HOPE for a few things; Blessings of health and happiness in 2016, good friends and family, good health and well-being for all. Happy Holidays! All the Best for 2016!