2016 midyear outlook: Modest growth, continued volatility
Two Wells Fargo reports suggest the U.S. economy will grow slightly faster in the second half of 2016 — but with continued volatility.
A moderate increase in growth and continued volatility are in store for the U.S. economy as the bull market enters its eighth year and remains sensitive to any signs of a slowdown or recession.
That’s the 2016 investment outlook from Wells Fargo Investment Institute and Wells Fargo Asset Management of Wells Fargo Wealth and Investment Management. Both groups are publishing their midyear outlook reports the week of June 6.
Another swoon in oil prices or a slowdown in global trade tied to China’s economy are two factors that could trigger another round of volatility, says Paul Christopher, head global market strategist and one of the authors of the Wells Fargo Investment Institute report, “Eyes on the Horizon.”
“The fundamentals are reasonably sound, but events in this environment could have more impact than they might in a faster-growing economy,” Christopher says of the outlook for the rest of 2016. “It’s like a slow-moving bicycle: You need more course corrections to maintain balance and stay on the path. Investors may need to adjust their portfolios more often, as some sectors and asset types show greater strength or weakness.”
Brian Jacobsen, a chief portfolio strategist with Wells Fargo Asset Management, adds that one or possibly two interest rate hikes* by the Federal Reserve (“Fed”) could also contribute to swings in the financial markets. He is one of the authors of the group’s midyear outlook, “Shifting Gears.
Steady but modest growth
In citing indicators that the U.S. economy should grow steadily, though modestly, both reports predict gains in consumer spending for discretionary items such as automobiles and apparel, the housing sector, and hiring. Historically low interest rates continue to encourage consumer borrowing, and inflation levels remain low.
“It looks like consumers are going to continue to do what they do best, which is to spend,” Jacobsen says. “Wage growth isn’t where we’d like it to be, but consumption spending seems well supported with continued labor market improvements.”
In non-U.S. markets, Christopher says Europe’s economy is beginning to turn around and holds more opportunity for growth than other developed markets such as Japan, Australia, and Hong Kong. Emerging markets such as China, Brazil, Russia, and India, he adds, continue to struggle to grow more quickly due to the need for economic reforms, despite their governments providing economic stimulus.
China, the world’s second-largest economy, is trying to convert to a more service and consumer-oriented economy from one based on manufacturing and construction.
“That transition is not an easy one,” Christopher says. “It means closing inefficient, polluting factories, finding new jobs for workers, and writing off accumulated debt. They could go through a period where growth slows more quickly than it has in the past and that could impact global trade and thus global financial markets.”
But he says the declines in oil prices earlier in the year, which some analysts interpreted as a sign of a possible recession, were tied to increased production rather than a fall in global economic activity.
No recession imminent
Jacobsen and Christopher agree that while this economic cycle is aging, there are no immediate signs of a recession, such as an overheated housing market, excess manufacturing inventories, or large amounts of consumer debt.
“Economic cycles are less like a person aging than like a baseball game, where innings can be long or short,” Christopher says. “We think we’re past the halfway point, but the game isn’t necessarily over even when you get to the ninth inning. Sometimes you can have extra innings.”
But the more the cycle ages, the more both say investors will need to be selective about their investment choices — adding that a well-diversified portfolio with a mix of asset types, such as stocks and bonds, remains critical to achieving long-term goals, such as retirement.
Concludes Jacobsen, “It’s a market environment that’s going to call for patience and diversification – two cardinal rules of investment.”
*The Fed raised rates in December 2015 for the first time since 2006.
Note: Read the full Wells Fargo Investment Institute report, “Eyes on the Horizon,” on the Wells Fargo Advisors website and the Wells Fargo Asset Management report, “Shifting Gears,” on The Wells Fargo Asset Management website.
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Diversification cannot eliminate the risk of fluctuating prices and uncertain returns. Diversification also does not guarantee profit or protect against loss in declining markets.
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