2016 Will Be Volatile—But That’s No Surprise
The stock market will experience ferocious volatility in 2016. We’ve been calling that here at Profit Confidential for what seems like ages, not because we have secret insight into the stock market, but because we actually look at the underlying data. And it’s been screaming “recession!” for a long time now. That doesn’t mean a stock market crash in 2016 will be bad for all stocks and investments. It means 2016 will be excellent for a select few investments.
U.S. Ripe for Recession in 2016
2015 was the year the stock market forgot. Not that it was an uneventful year. It was full of surprises, a mix between a roller coaster and a haunted castle. That didn’t stop Wall Street pundits from predicting a strong year and, even as the year limped along for renewed calls of a Santa Claus rally, it didn’t happen.
For some odd reason, these same economists are calling for a strong 2016, with the long-in-the-tooth bull market that began in 2009, advancing from seven percent to 11%. These so-called top strategists are running counter to everything we’ve been predicting here and continue to call for: a global recession in 2016.
While my outlook for 2016 has not been fully embraced by many, the economic data that has been trickling out for ages backs it up. And the start to 2016 shouldn’t be that big of a surprise to anyone who knows how to read. Investors can only support anemic economic growth and an overvalued stock market for so long.
Here at home, the U.S. Manufacturing PMI fell to 51.3 in December, down from 52.8 in November and at its lowest level in three years. The Empire State Manufacturing Index stayed negative for the fifth straight month in December. While the Philly manufacturing index fell into negative territory in December, its third trip into the red over the last four months.
Manufacturing isn’t what it once was in America. Neither is consumer spending. And Wall Street, while staring the data in the face, just chooses to smile and wave.
Incredibly, before the clock struck midnight on December 31, 2015, the S&P 500 was still trading near record-highs. But for investors, the descending silver ball foreshadowed the direction of the stock market over the next few months.
The American economy simply isn’t doing as well as Wall Street and Capitol Hill want you to think it is, or rather, the economy is doing well on Wall Street and politicians seem to be doing well too. Main Street on the other hand, not so much. Thanks to rising interest rates, cash-strapped, debt-bloated American consumers will not be able to carry the global economy on its shoulders.
The proof is in the numbers. In the fourth quarter, the estimated earnings decline is forecast at -4.5%. If the index reports a decline in fourth-quarter earnings, it will be the first time the index has seen three consecutive quarters of year-over-year declines since the first quarter of 2009 to the third quarter of 2009. (Source: “Earnings Insight,” FactSet web site, December 18, 2015.)
How can revenues go up if earnings are down? They can’t. The estimated revenue decline for the fourth quarter of 2015 is -3.1%. If this is the final revenue decline for the quarter, it will be the first time the index has seen four consecutive quarters of year-over-year revenue declines since the fourth quarter of 2008 through the third quarter of 2009.
Global Markets Finally Respond to China
Again, for some reason, investors were shocked when a global sell-off greeted them at the start of 2016. Investors were spooked back in August after China’s stock market crashed, but those fears were assuaged by nothing more than good will.
Nothing has changed since then. China is still in trouble and it came into focus in the New Year after China’s stock market crashed. The drubbing in Chinese stocks came after the Caixin/Markit index of Chinese manufacturing activity contracted for the 10th consecutive month in December to 48.2 from 48.6 in November. (Source: “Markit Economics,” Markit Economics web site, January 4, 2016.)
Stocks around the world followed suit, the Dow Jones Industrial and the S&P 500 tumbled, and that tipped Germany into a bear market. Europe is China’s most important trading partner and the world’s second-biggest economy. So an economic slowdown in China does not bode well for the global economy, especially in light of weak economic data coming out of the U.S.
The future does not look bright for China. The country’s central bank expects 2015 growth to be the slowest in 25 years. After growing 7.3% in 2014, the Chinese economy is thought to have grown by 6.9% in 2015 with 2016 expansion forecast at 6.8%. (Source: “Slowdown in Chinese Manufacturing Deepens,” The Guardian, January 1, 2016.)
The fact of the matter is that this data has been streaming out for months and months now and shouldn’t have caught anybody off-guard. Fresh concerns about trouble brewing in the Middle East certainly aren’t going to help the global economy in 2016.
Prepare for a Stock Market Crash in 2016
The stock market may be near record-highs, but hidden in the charts is a stealth bear market. That doesn’t mean all stocks will get hammered. Why would it? But the weakening global economy, continued strength of the U.S. dollar, and rising interest rates will certainly put pressure on commodity prices and corporate profits.
And with all the economic ingredients in place for a serious stock market crash in 2016, the Federal Reserve and central banks around the world are out of market-manipulating tricks. Still, there are investing opportunities that will do well in this kind of economic climate:
ProShares Short Dow30 (NYSE:DOG): The ProShares Short Dow30 seeks daily investment results (before fees and expenses) that correspond with the inverse (-1x) of the daily performance of the Dow Jones Industrial Average.
ProShares Short S&P 500 ETF (NYSE:SH): The ProShares Short S&P 500 ETF seeks daily investment results (before fees and expenses) that correspond to the inverse (-1x) of the daily performance of the S&P 500.
VelocityShares Daily 2x VIX Short Term ETN (NYSE:TVIX): The VelocityShares Daily 2x VIX Short Term ETF provides two-times leveraged exposure to the S&P 500 VIX Short-Term Futures index.
Goldcorp Inc. (NYSE:GG): When it comes to global turmoil, there’s nothing like keeping an eye on some of the best gold stocks. Canadian gold miner Goldcorp has seen its share price tumble 32% over the last 12 months, because of depressed gold prices. But, thanks to new mining operations, the company’s third-quarter production increased more than 40% to 922,220 ounces. As a major gold producer, Goldcorp is poised to rebound on the heels of economic instability.
Please note that the above are not buy recommendations, but simply meant as examples of the investing opportunities investors may consider.