Ameriprise Financial : The New Year Brings Cautious Optimism Mixed with Concern

01/05/2016| David Joy

Investors worldwide were met with a rude awakening on the first trading day of the New Year. Stocks began the day sharply lower in China following a weaker than expected report on manufacturing activity. Circuit breakers were triggered twice during the day, the second halting trading for the rest of the session after prices fell 7 percent. The Markit Purchasing Managers' Index (PMI) for manufacturing showed that the pace of contraction deteriorated in December, following two straight months of modest improvement.

It was back in August when such growth worries pushed global markets lower by more than 10 percent. In both Japan and the Eurozone, stocks fell by more than 3 percent. And in the U.S., after being down by more than 2.5 percent at midday, stocks managed to mount a slight comeback and close down 1.5 percent. Rising tension between Saudi Arabia and Iran didn't help sentiment and even evoked scenarios where the flow of oil is interrupted and the price spikes.

A Weak Start to the New Year Raises Investors' Concerns

Investors generally entered the New Year with modest optimism, but not without concerns about valuations and earnings growth. Having the global growth question raised on day one will only reinforce those concerns. But it's important to remember that China has been working to stimulate its economy for more than a year through a series of interest rate cuts and fiscal stimulus measures. While disappointing, the weakness in China's manufacturing sector is not the start of a hard landing.

It should also be noted that PMI readings in the U.S., Japan and the Eurozone were all higher in December and in expansion mode. Still China bears watching. Back in August, worries about China were enough to keep the Fed on the sidelines. If those worries persist, the Fed may have to lower its expectations of the number of rate hikes this year from four down to the market expectation of two. The minutes of the December FOMC meeting, at which it chose to raise rates, will be released on Wednesday and should make for interesting reading.

Looking Ahead: What can we Expect in 2016?

Our own outlook for 2016 anticipates U.S. GDP growth of 2.4 percent and three quarter-point rate hikes. Once again, most of the heavy lifting will be done by the consumer. Job creation, low energy prices, low inflation and strong balance sheet deleveraging have left the consumer in a solid financial position. Although the focus of consumer spending has changed recently, ongoing strength in housing and auto sales should more than offset weakness elsewhere.

Government should be a modest net contributor this year as well. But the slump overseas and the strong dollar will continue to be a headwind for manufacturing, as well as for materials prices and industrial goods. Monday's market action reflects those trends.

It won't be long before investors turn their attention to fourth quarter earnings, which are expected to be down 4.7 percent according to Factset. Before they do, there are a number of economic reports to watch. In the U.S. this week the focus is on the December jobs report on Friday. The labor market is thought to have remained strong, generating another 200,000 new non-farm jobs, with the unemployment rate remaining at 5.0 percent. Average hourly earnings growth will be interesting to watch. The year-over-year increase is expected to jump to 2.8 percent from 2.3 percent last month. If it does, it would represent the highest rate since the start of the recovery in 2009.

Accounting for the steep jump from last month is the replacement in the calculation of a negative number from last December, when average monthly hourly earnings fell -0.2 percent, with what is expected to be 0.2 percent growth this past December. Overall, the labor market has been improving, as 2015 began with an unemployment rate of 5.6 percent and the economy will have generated 2.5 million new jobs. Other important reports on the calendar this week include vehicle sales, ISM non-manufacturing and durable goods. In the Eurozone, December inflation reports will be watched carefully after consumer prices unexpectedly fell in Germany. Retail sales and a variety of confidence indicators are also scheduled.

We ended last year focused on, among other things, global growth, the price of oil, the pace of interest rate hikes and the strength of the dollar. On the first trading day of the New Year, we were starkly reminded that each of these issues remains unresolved.

Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Purchasing Managers' Index™ (PMI™) is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers' Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times index inverted so that it moves in a comparable direction.

FactSet Research Systems Inc. is a multinational financial data and software company headquartered in Norwalk, CT, United States. The company provides financial information and analytic software for investment professionals.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

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