"Kee" Points with Jim Kee, Ph.D.

The Atlanta Fed’s GDPNow model is now forecasting a mere 0.1% growth for the U.S. economy for the first quarter of 2016. That would actually be consistent with the last few years as the first quarter GDP growth numbers initially came in negative for both 2014 and 2015 (2015’s numbers were subsequently revised upward to positive as more data became available). Consensus estimates are a little rosier, ranging between 1.4% and 2.5%, which is consistent with the Atlanta Fed’s model typically being on the conservative side (it was initiated summer 2014). We had expected this “growth scare,” as consensus estimates for U.S. and global GDP have consistently been too high each year throughout this expansion, and 2016 seems to be no exception.

 

Most analysts expect U.S. growth to expand in the 2.0% plus range this year. The current expansion began during the summer of 2009, making this expansion one of the longest (6.5+ years) and weakest (about 2.0% growth) on record. The longest expansion was 10 years, the shortest was 12 months. Expansions are typically brought to an end by economic shocks, and I think that some of the optimism for the U.S. going forward has to do with the fact that we have likely suffered the worst of several major shocks, such as the big increase in the dollar that began almost 2 years ago, and the collapse in oil prices that roughly occurred during the same time period. The other big shock has been the continued slowdown of the Chinese economy. That too is expected to moderate somewhat this year, if for no other reason than that the policy response on the part of Chinese officials (monetary and fiscal) is expected to ramp-up. Either way, 2016 looks to be another year in which each of the world’s major economies grows a bit below their long-term trend.

 

As for stocks, U.S. indices are about flat for the year, while the MSCI World global index is down slightly. Consensus estimates for the S&P 500 range from around 2,000 (currently ~2,050) to 2,270. That comes out to a total return range (price appreciation plus dividends) somewhere between flat and 12%. Stock market returns will likely be driven mostly by company earnings over the next several quarters, plus the balance of local and global shocks both positive and negative. I think an objective view of the data would lead to an outlook of positive but below average returns for stocks in 2016.

 

Finally, on the election outcome, Wharton’s Jon Scott Armstrong’s “PollyVote” currently estimates the odds of the Democrats retaining the White House at 53.5%, leaving the Republicans with a 46.5% chance. I think you will all agree with me that this election year is certainly a different one, with inter-party battles (within the parties) dominating intra-party battles (between the parties). That’s added an interesting twist to this election year, as it is already April and the candidates within each party are still slugging it out! We will be talking more about the impact of each party’s proposals on stocks, GDP, sectors, and budgets and revenues as we get more clarity in this muddled election year.