Stock market volatility continues to make headlines as uncertainty about the possibility of future interest rate increases puts monetary policy on center stage. Couple this new reality with modest U.S. and global economic growth, the start of slow emerging-market recovery, single-digit stock returns and further weakness in China — and the 2016 market assessment is fraught with credit, rates and currency risks, according to the Bank of America Merrill Lynch Global Research 2016 Year Ahead Outlook.
The question is, will these trends continue, or are signs of greater stability and balance on the horizon?
Global market conditions, and potential opportunities for investors to adjust to market ups and downs, will be addressed by Christopher J. Wolfe, managing director and head of the Merrill Lynch Chief Investment Office, at the SSU Economic Outlook on Feb. 24. Wolfe is also the chief investment officer for private banking and group and institutional investment within the Global Wealth & Investment Management Division of Bank of America.
He will discuss the “big picture” of potential events and policy decisions impacting the year ahead: modest global growth recovery is expected this year, helped by developed (not emerging) economies; moderate inflation keeps interest rates lower for a longer period; and dependency on monetary policy, a stronger dollar and lower commodity prices keeps market fluctuations high.
Globally, expectations are that developed economies will aid a global growth rebound with estimates that the U.S. economy’s GDP growth will be stable this year, with slow and steady growth of about 2.0 percent as of Feb. 11, according to Merrill Lynch, while the Eurozone’s growth forecast will be 1.5 percent, Japan’s 1.2 percent, and India’s 7.6 percent, according to the International Monetary Fund (IMF).
At the same time, China is forecast to see a decline in growth from 7.4 percent in 2014 to an estimated 6.6 percent in 2016, and that Brazil will go from a 2014 growth rate of 0.01 percent to -3.5 percent this year, based on IMF and BofAML Global Research data.
While developed markets (DM) continue to lead emerging markets (EM) in terms of GDP growth, by an aggregate 4.2 percent for DM to 2.1 percent for EM in the 2016 forecast, the gap between them has been narrowing since 2013.
Wolfe calls the current U.S. situation a “penny farthing economy” where the services sector is the strong, giant “wheel” pulling the manufacturing sector along. The U.S. manufacturing purchasing managers’ index, or PMI, has been contracting since fall 2014 from a high of 58, according to Bloomberg, Bureau of Labor Statistics and the Merrill Lynch Wealth Management Chief Investment Office (MLWMCIO).
The PMI measures the activity level of purchasing managers in the manufacturing sector. A reading above or below 50 indicates expansion or contraction, respectively, in the sector.
The final Institute for Supply Management PMI for the U.S. came in at 48.2 in January, down from a preliminary estimate of 53.7 and a final of 54.3 in the previous month. It is the lowest figure since October 2013, due to a slowdown in output and new business while employment was sustained, according to Markit Economics.
The services PMI index is based on data collected from a representative panel of over 400 private sector companies covering transport and communication, financial intermediaries, business and personal services, computing and IT, and hotels and restaurants. The index tracks variables such as sales, employment, inventories and prices.
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