Let me start by saying that I am usually very optimistic at the start of a new year. However, 2015 was a difficult year to make money. Santa Claus wasn’t very generous to Wall Street and downright mean to Canada. Plus, I just can’t resist being an armchair economist. A lot has changed during the past 40 years since I graduated from university with a degree in economics. Some factors that affect economic growth remain the same. I call them the 3 “Ds”, debt, demographics and deflation.
Too much debt dampens growth
Economic growth depends upon government, business and consumer spending on goods & services. It is hard for these three engines of economic growth to spend if more dollars are being diverted to paying down debt plus paying interest charges. Monetary policy of keeping interest rates low hasn’t spurred very much growth so far.
Now, prior to the “Great Recession”, governments were able to stimulate spending by reducing tax rates for both business and consumers. Slower than normal economic growth is compounding the problem for governments because tax revenues are being reduced. Canada is one of the few countries whose government has plans to spend money on infrastructure and lower taxes for middle-income families to avoid a recession.
Demographics – the graying population are saving instead of spending
There are 10,000 U.S. baby boomers turning 65 each day and most are inadequately prepared for retirement. Nearly half of elderly Americans would be living in poverty without Social Security. These retiring baby boomers will be a burden on government health care programs and social services. Even, China has made a surprise move to end its one child policy.
China’s government has said the country could become home to the most elderly population on the planet in just 15 years, with more than 400 million people over the age of 60. Researchers say, and the world’s second-largest economy will struggle to maintain its growth
The children of the baby boom generation have different spending patterns than their parents. They are less materialistic and focus their spending on experiences. They are also delaying moving out of their parent’s basement, getting married and having children. This is partly due to high levels of student debt.
Deflation – has some negative effects on growth
Falling prices encourages consumers to delay spending, waiting for items to get cheaper. Deflation makes it difficult for business to increase prices which leads to cutting costs. Corporations end up reducing staff and freezing employee wages. They also reduce or delay corporate spending which adds to a slowdown in economic growth.
Many resource based countries are facing recessionary pressures from the collapse in commodity prices. Australia, Brazil, Canada and Russia are just a few countries smuggling to generate some economic growth.
Slow economic growth equals lower stock market returns
The NASDAQ was the only U.S. index to have positive returns in 2015. The other three indexes, S&P 500 (SPY), Dow Jones (DIA) and the Russell 2000 (IWM), were all negative. See chart below:
Canada is a good example of the correlation between economic growth and stock market returns. Economic growth was negative for the first six months of 2015, slightly positive for the next three months and the results for the last three months are not available yet. The deflationary factor of the collapsing price of commodities was the main cause for the negative returns in the Canadian stock market (XIC). See the chart below:
The outlook for stock market returns in 2016 isn’t very bright from an economic point of view. This could be the year of the bears and not the bulls to make money.