Q4 Economic and Investment Update
According to John Waggoner, a market observer and contributing writer for Morningstar.com, there were three major financial stories for 2015. First, there has been the tumbling price of oil, due to the enormous production by the US and Saudi Arabia at the same time that slowdowns in Europe and emerging markets reduced demand. While this development seems fortunate for consumers, it has wreaked havoc in the energy sector. The second significant development in 2015 has been a gradually tightening labor market. The unemployment rate has been falling since its post-recession peak of 10% in October 2009, dropping very gradually to 5% in its most recent reading. This is significant because it starts to hit the lower bound of what economists call the level of noninflationary growth, which means that future reductions in unemployment may result in contributing to higher inflation. The final big development is the likelihood of the Federal Reserve raising interest rates this month. This step has been a long time coming, and some would say that it is overdue. Rates have been so low for such a long time that a 0.25% increase will not have much of an impact but would at least provide some ammunition for the next recession.
The stock market has been frustratingly volatile in 2015. While indicators show that the US economy grew as expected, stock market volatility was likely the result of the rest of the world’s underperformance, especially in the emerging markets. Generally, riskier stocks and bonds have year-to-date losses. Growth stocks from large US corporations have eked out small positive returns as have short-term and high-quality bonds. Stocks from companies in developed foreign nations such as Europe and Japan have done a bit better. I am still hoping for a nice uptick in stock prices these last few weeks of the year!
Looking ahead to 2016, Vanguard just released its economic and investment outlook. In a nutshell, while their research suggests that global growth will remain frustratingly fragile in 2016, it is on course to become its longest expansion in nearly a century. More on this in our January articles!