With China making a decent attempt to derail global markets straight out of the starting blocks into 2016, the US investment community faces a bumpy year of uncertainty despite the country’s sound economic fundamentals relative to its peers.
The New Year hangover was off the back of what was already a tumultuous 12 months for the financial services industry in 2015, where simmering concerns over China and a dramatic and ongoing commodity price rout combined to leave the S&P 500 in the red for the year and posting its worst annual showing since the financial crisis.
Early signs suggest 2016 will be just as bumpy a ride. One may have noticed a looming Federal election, which markets tend to become nervous about. This year we have a somewhat loose cannon still in the running, if the man with the hair remains a possibility as the months get closer then market jitters will abound.
More immediate though, this week both the Dow Jones Industrial Average and Nasdaq were down on the first trading session of the year (by 1.58% and 2.08% respectively) on the back of disappointing Chinese economic data and escalating tensions in the Middle East.
The volatile start to the year followed the suspension of trading on China’s stock markets after the CSI 300 Index dropped an alarming 7%, such early volatility will likely be a prelude to what promises to be a year of more uncertainty for US markets.
On the plus side, macroeconomic conditions in the US remain favourable, with unemployment continuing to fall, inflation creeping up and the price of oil continuing to languish at record contemprary lows. Indeed, the Federal Reserve’s decision to raise rates by a quarter of a percentage point at the end of 2015 sent out a strong message that its economy is back on track.
But the US economy also faces major headwinds. The strongest of which is China, as evidenced by the first day of trading in 2016. Figures released on Jan 4 showed a decrease in the Caixin/Markit index of Chinese manufacturing in December. This sent China’s main index into freefall, which in turn drove US markets deep into negative territory and reminding investors that the holiday period was over.
While the US economy continues to strengthen as its domestic engine revs into gear, it remains highly vulnerable to external shocks, of which China features uppermost. The recent tensions between Iran and Saudi Arabia also played their part in Monday’s sell off, further underlining the interconnected nature of the global economy and how the US is by no means immune to the geopolitical and economic uncertainties currently engulfing the world.
This interconnected fabric of the world economy also raises questions over whether the divergent monetary policies pursued by the ECB and Fed will lead to a damaging discord and whether central banks should try to act more in tandem with one another.
The strong US dollar — which is expected to be a world beater again in 2016 — poses another challenge as it puts a strain on US manufacturing and exports which could eventually feed through to employment numbers. The U.S. ISM Manufacturing Index data has been falling for months and this is something policymakers will need to keep their eyes on. And the recent increase in interest rates will further strengthen the dollar. So the question of how frequently and by how much the Fed raises rates in 2016 takes on added importance. This will also be uppermost in the minds of bond investors. With interest rates usually having an inverse relationship with bond prices, further rate rises will likely see a fall in the price of most bonds.
But the question of how frequently the Fed will raise rates is complicated by the fact that Janet Yellen may no longer be at the helm of the central bank should the Republicans win the upcoming Presidential election. Republican candidates have been very vocal in their criticism of the Fed and, should they win the Presidential race, may opt to replace Yellen.
Elsewhere, the US banking sector faces a challenging 2016 with the Fed set to impose tougher stress tests on the largest banks. And the plunging price of black gold represents a serious danger for banks with large energy exposures, such as JPMorgan, which are expected to increase loan loss provisions. Further compounding the misery of the banking sector, the rapid growth of online lenders is expected to pose a significant challenge to traditional bricks-and-mortar banks.
Meanwhile, the wealth management sector continues to come under assault from the robo-advice space which is far more sophisticated in the US than the UK. Robo-advice is set to become a mainstream offering in the US over the next few years, with the country’s population — especially the younger generation — at ease using such offerings. However, if US wealth managers can embrace these online propositions and use them to expand their client base then the rise of robo-advice could be a big win-win.
And technology as a whole will remain at the forefront of financial innovation. So look out for developments in the insurance space as the “InsurTech” scene continues to evolve and insurance companies create lifestyle apps for mobile phones. Meanwhile Blockchain, the power behind digital currency Bitcoin, is set to make further inroads into the insurance market.
Ultimately, the US boasts solid underlying economic credentials but the globalized nature of financial markets means that the country will always be vulnerable to external shocks and geo-political tensions.
All of which makes any predictions for 2016 extremely difficult.