On December 16th, 2015, the Federal Reserve raised interest rates for the first time in almost a decade. While still extremely low by historical standards, the Fed Funds rate was effectively doubled from the old target of a 0.25% cap to the new target cap of 0.50%. Voting members at the Federal Reserve were unanimous despite recent divisions among
these policymakers, some of whom preferred to wait until next year to raise rates. While Fed Chair Janet Yellen claims the Federal Reserve will remain "accommodative" in its monetary policy immediately ahead, the "small print" within the Fed's post-December meeting statement suggests otherwise. The median estimate for the targeted Fed Funds rate by current voting members of the Federal Reserve at year-end 2016 is 1.4%; and then to 2.4% by the end of 2017. This implies four separate 1/4-point hikes this coming year and an additional four separate 1/4-point hikes next year.
Quite frankly, I see almost no chance for these kind of rate hikes in 2016 or 2017. In fact, I see at least an even 50-50 probability that the Federal Reserve will actually reverse its latest 1/4-point hike in 2016, and I would not be at all surprised to see negative interest rates at some point over the next two years (in response to deteriorating economic conditions and actual recessionary forces).
Yesterday, the Institute for Supply Management (ISM) released its latest monthly Chicago Purchasing Managers report. The December Chicago PMI plunged to a
reading of just 42.9, down 5.8 points from the previous month. This latest reading represented a new 6-1/2
year low and was the seventh contraction this year. It also was far below
expectations of a break-even reading of 50. Readings above 50 represent economic growth and readings below 50 represent economic contraction.
The biggest contributor to the decline was a 17.2 point collapse in order
backlogs, to 29.4, marking their eleventh consecutive month in
contraction. December's reading was the lowest since May 2009. The index
also was depressed by ongoing weakness in new orders, which contracted
at a faster pace, down 5.3 points to 38.8, the lowest level since May
2009. Both production and employment also fell into contraction (below 50).
While regional indicators like the monthly Chicago PMI don't always reflect the direction of the National economy, this latest completely unexpected negative Chicago report bears more than the usual scrutiny for its implications nationwide.
I see myself as a decent market technician and better than most at reading the "tea leaves" of U.S. and global economic activity, but I can't begin to match Wall Street experts at corporate earnings estimates or supply-chain data flow. I have no "pulse" when it comes to merger and acquisition activity, and the new issue market is a complete blank to me. It was reported today that famed hedge fund manager David Einhorn posted a 20% loss in his flagship fund for all of 2015. I can say with complete certainty that Mr. Einhorn and his expert staff know more than me on almost every valuation measure and metric you can imagine. However, being the smartest person in the room doesn't always guarantee success on Wall Street. In fact, quite simply, I had a better year than Mr. Einhorn and also a better year than the average hedge fund manager who lost approximately 3% in 2015. My rate of return for 2015 on taxable funds under management was +42.58%; for non-taxable funds it was +2.23%; and the blended rate of return on combined funds was +17.54%. However, that was "yesterday", and the keys to the kingdom in this business can be elusive. 2016 is a new year, and what have you done for me lately?
Here are the annual rates of return for the major averages in 2015:
DJIA - 2.23%
DJTA -17.85%
S&P 500 - 0.73%
NY Composite - 6.42%
Russell 2000 - 5.71%
Gold/Silver Index (XAU) -34.14%
Oil Index (XOI) -25.20%
Nasdaq Composite + 5.73%
While forecasting is always a dangerous game, here are some of my predictions for 2016:
1. With the U.S. economy already in recession (in my view). GDP will actually contract in Q-1 and Q-2 to begin this new year.
2. There will be no interest rate hikes from the Federal Reserve in 2016.
3. Most major U.S. stock market averages will post at least a 15% correction in the first half of 2016.
4. The housing and auto sectors will lead the downturn in the U.S. economy.
5. The U.S. Dollar is vulnerable to a major correction in foreign exchange dealings in 2016. I think the closely watched Dollar Index (DXY) topped out at 100.60 on December 3rd, 2015 and will trade at least 10% lower at one point in 2016.
6. I believe that commodity prices have bottomed, but the expected recovery will be U-shaped and often marked by fits and starts. Copper and steel share prices look interesting to me at current depressed levels, and I am now looking to dip my toes into the energy sector despite the obvious negatives in the supply/demand picture for this arena.
7. Gold and Silver prices will be sharply higher at year-end 2016 as speculators begin to discount lower U.S. interest rates, a weaker U.S. Dollar, and even the possibility of QE4 from the Fed, but I am not ready to bet the ranch on the ultimate bottom just yet. While bearish sentiment is "off the charts" (and therefore bullish if you are a contrarian), the trader in me sees one last short-lived selling spree in these two closely watched precious metals markets.
8. Hillary Clinton will be the next president of the United States. Her victory next November will be viewed as a landslide over her Republican opponent. The perceived mandate from this landslide victory will have dramatic consequences for Wall Street. And the Health Care industry will be shaken to its roots!
Here are three very interesting charts for your review (please note the Red Dot sell signals):
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| Housing Sector Index (HGX) Weekly Chart with Computer-generated Buy & Sell Signals |
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| Housing Sector Index (HGX) Monthly Chart with Computer-generated Buy & Sell Signals |
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| NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals |
