Market Facing Strong Headwinds Next Year in Form of Strong Dollar, Political Uncertainty
2015 is shaping up to be a pretty lacklustre year for the markets, barring some sort of strong rally in the last couple of days of the year. Some are already dubbing 2015 as the "year where nothing worked", thanks to the subpar performance of many sectors and indexes over the past 12 months.
The "returns" in 2015 (the S+P 500 and DJIA are looking to finish more or less even for the year, while the NASDAQ will likely finish slightly higher) are particularly jarring when compared to the massive gains enjoyed after the end of the "Great Recession" in the United States. An "easy money" environment juiced returns as investors piled into equities and avoided bonds like the plague. With interest rates starting to increase, however, the appeal of equities has started to wane.
Analysts seem to be fairly nonplussed over the potential market returns in 2016, as a number of different factors seem to be conspiring to put a damper on the major indexes next year. Some of the factors that may throw water on the market next year include:
1) Increasing interest rates and a stronger US dollar. While other central banks are easing, the Federal Reserve has begun the process of tightening. This should continue to boost the US dollar in 2016, which will, in turn, weigh on the earnings of US companies doing business abroad. It seems hard to imagine that the trend of a strong US dollar will diminish anytime soon.
2) Dropping oil prices. Have oil prices hit bottom yet? Supplies remain hit and prices continue to drop.
3) Reduced exposure to equities. With interest rates on the increase and the markets having turned in an off year in 2015, you can safely assume that many investors will choose to diversify their portfolios into other assets (bonds, real estate, etc), and this should weigh on equities as well.
4) Election volatility. With a potential Donald Trump vs Hillary Clinton battle looming in 2016, the markets will likely be on edge until a winner is crowned.
The markets have proven to be incredibly resilient over the past 6-7 years, though the deck seems to be stacked against against the DJIA, NASDAQ and S+P 500 posting strong returns next year.
Filed under: General Market News