Happy New Year, btw, World Economic Growth for 2016 is going to SUCK!

new year 4

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:

2015

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:

2015a

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.

 

 

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2 thoughts on “Happy New Year, btw, World Economic Growth for 2016 is going to SUCK!

  1. We are on the same page with our line of thinking. I worry about where the market is going 2016 and I am doubtful we are going to have a strong year. I have a post coming next week where I discuss my fear of investing, yet I plow forward and invest anyway. The way I see it, there really is no other way to grow your money and keep up with inflation. Markets will always go up and down but I still worry that the “recovery” isn’t telling the whole story. My husband and I talked about becoming landlords, but our state isn’t all that ” landlord friendly” and we are concerned about grappling with bad renters. We even spoke to several financial advisors in which all of them insisted that we have things in the right place and can expect to retire millionaires. Yeah right! When I see it, I’ll believe it!

    Like

    • As a retired financial advisor, part of the job was hand holding during uncertain times. So I am not surprised that you have been reassured that everything is going according to plan. Timing the market is impossible but buying on market dips will new money can boost returns over the long run.

      I plan on writing posts about ETFs that you can buy that go up in valve when markets go down. I will also write about ETFs that use call options that could boost returns in sideways market and reduce losses in down markets.

      Now, I do know of people who have made lots of money being landlords but I also know people who have gone to hell and back trying to get rid of bad renters.

      Your comments are always appreciated!

      Liked by 1 person

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