10 financial predictions for 2016

This article first appeared on WalletHub and is reprinted here with their permission. Click here for the original post.

We seem to be on the precipice of… something. Not only is 2016 an election year, but it’s poised to be an especially contentious one as two parties sporting diametrically opposed views about both where the country stands today and where it should go tomorrow confront monumental issues ranging from income inequality and tax policy to terrorism and climate change.

Then again, we’re also on the verge of … nothing. Domestic economic growth in the New Year is expected to be modest. Numerous analysts are projecting a flat year for the stock market. And while employment is nearing target levels set by policymakers, many people still feel abandoned by the economic recovery.

It is with that context that we count down the final days of 2015 and prepare to enter the unknown. No one can predict precisely what the future holds, after all, but we can make some educated prognostications in order to help prepare both you and your wallet for the challenges and opportunities that 2016 will inevitably bring.

Below you can find a breakdown of 10 important financial developments that WalletHub’s editors believe will occur in 2016, in addition to predictions from a panel of leading economists.

1. U.S. GDP growth will be roughly 2.4 percent, lagging the worldwide average of roughly 3 percent.

The United States economy is widely expected to be characterized by slower growth during 2016, with the word “tepid” frequently being employed in the context of projections. This only makes sense, after all, considering that the U.S. has for years been at the vanguard of the recovery from the Great Recession and many economies are just now beginning to catch up. What’s more, uncertainty borne from a variety of headwinds that emerged during the course of 2015 – which resulted in widespread estimate cuts during the year – is expected to limit growth in 2016.

“I expect the growth to be in the lower end of the range between 2.4 percent to 2.5 percent,” said Donald Atwater, a professor of economics at Pepperdine University. “The reasons are the uncertainties surrounding oil and commodity markets, rising interest rates, and disruptions from El Niño, terrorism, and the national election.”

2. The U.S. will approach “full employment.”

Perhaps the primary reason why Federal Reserve interest rate speculation has become so rampant is that unemployment fell significantly during 2015, dropping from 5.7 percent in January to 5.0 percent in November, according to data from the Bureau of Labor Statistics. This trend is expected to continue during 2016, though employment gains should begin to taper off as we approach what many economists consider to be full employment.

Full employment is not strictly defined, though the Fed’s target unemployment rate is 5.0 percent, and members of the Federal Open Markets Committee pegged the long-run “normal” level of unemployment at 4.7 percent to 5.8 percent, with a median of 4.9 percent, at their September 2015 policy meeting. We are therefore already at full employment by some accounts, but there is still work to be done according to others, as the currently-unemployed percentage of the working-age population (59.3 percent) was unchanged for the year through November and still well below pre-recession levels (62.7 percent in December 2007).

“The labor market will continue to be a theme,” said Julie Heath, director of the University of Cincinnati’s Economic Center. “The unemployment rate will drop even further, perhaps down to the mid-4’s, although probably more slowly as the slack in the labor market is taken up. That tightening will result in higher wages, but again, that will happen with a lag and slowly.”

Employment gains will not, however, quell discussions about income inequality in the months to come. Wages are only projected to grow at a modest 3 percent clip, and a significant share of income gains in recent years have gone to the top 1 percent of earners. “Given that 2016 is a presidential election year, coupled with the fact that the continuing economic, social, and political issue confronting not only the U.S. but the world is inequality, I would expect that to be the biggest economic theme confronting us in the year ahead,” said Allen R. Sanderson, a senior lecturer in economics at the University of Chicago.

3. The S&P 500 will end the year at 2,188.

2015 was a largely lost year for the stock market, with the S&P 500 entering January at 2,058 before dropping to 2,022 by mid-December amid chaos in energy markets and fears of a Fed rate hike. The market is expected to recover modest gains by year’s end as fund managers strive to hit performance benchmarks, but that does not equate to a rosy outlook for the New Year – at least not immediately.

“It depends on how many times the Fed raises interest rates,” Heath said. “The Fed doesn’t want to raise rates too high, too fast because that will only further strengthen the dollar as investments in Treasuries increase. Likewise, they don’t want to be too slow if labor market and inflation data indicate the economy is heating up. So, if the Fed hits the Goldilocks pace of rate increases, the stock market will probably dip a bit immediately after the rate hikes, but bounce back fairly quickly. In all cases of rate hikes dating back to 1982, the market dipped but then by a year later, had rebounded.”

We should therefore brace for some more turbulence in 2016 – especially income investors – but the long-term set-up appears strong, considering the dearth of alternative investment opportunities and the underlying strength in the economy.

4. U.S. auto sales will flirt with 18 million.

While recalls and an emissions scandal grabbed many of the headlines in 2015, it was nevertheless a hot year for new wheels. Nearly 16 million vehicles had been sold through November 2015 – 5.4 percent above 2014’s pace – and the total is projected to hit 17.3 million by year’s end. Despite expectations for rising interest rates, the auto industry should continue to strengthen during 2016 as consumers replace their elderly fleet of vehicles, fueled by energy savings, employment gains and a desire to secure financing before it gets too expensive.

“If prices stay low for fuel, there will be more money available for other goods,” said Robert O. Weagley, chair of the personal financial planning department at the University of Missouri. “Transportation is about 17 percent to 18 percent of the American consumers’ total expenditures, so the overall effect would be greater than if the same price change occurred in an area that takes up a smaller portion of consumers’ budgets.”

With that being said, if the auto industry does not break its record for annual vehicle sales – 17.4 million in 2000 – this year, that threshold certainly will be surpassed in 2016 as sales stretch to an almost-mythical 18 million vehicles.

5. Oil prices will post a modest rebound.

Carnage in the oil markets characterized much of 2015, with the cost of a barrel of crude oil crashing into the mid-$30’s in December from an intra-year high of $65.56 in May. And while market analysts foresee an inevitable slowdown in production as supply begins to overtake both short-term demand and long-term storage capacity, global energy market politics are signaling that things will get worse before they get better.

“We may be talking about $30 per barrel oil early in 2016,” said Mark Johnson, an assistant professor of finance at Loyola University Maryland. “At some point, oil will rise as the active rig count continues to decrease and production starts to slow. I could see oil finishing 2016 at $40 to $45 per barrel.” 

6. The Fed will raise rates once in 2016, bringing its median target rate to 0.625 percent.

We know that the Federal Reserve will increase its target federal funds rate slowly. Just how slowly remains to be seen, however, depending on the economy’s reaction to its first jolt from near-zero levels in more than nine years.

Members of the Federal Reserve project that the Fed’s target rate will conclude 2015 at 0.4 percent – which would be consistent with a 25-basis-point hike from the current range of 0 percent to 0.25 percent – before continuing to rise to 1.4 percent by the end of 2016. Yet there has been significant disagreement about the trajectory of rate increases from economists and market analysts, even within the Fed’s ranks. Talk of rate increases is nothing new either, with projections and sentiments ebbing and flowing for at least the past two years.