Global and Equity Market Risks Are Hovering over 2016

In 2015, many firms in the US (IWM) inflated their earnings and assets, as cheap credit was available. Firms have extensively borrowed funds to increase shareholder returns through buybacks and high dividend payouts. Read, Bill Gross Believes Every Asset Price Is Artificially Elevated for more information.

The rise in the cost of borrowing as a result of the Fed’s December 17 rate hike and the subsequent rises expected will certainly affect this trend. 2016 may see growth and earnings of US firms come under pressure.

The commodity price slump and the strengthening US dollar are two major market risks hovering on the investment outlook for 2016.

Commodities, especially oil (USO), have been following a declining trend all through 2015. The fall in oil prices continues to affect energy sector firms in the US. With an oversupplied market continuing to exert pressure on prices, crude oil prices could stay low for a while. 2016 is also expected to be a year of oversupply with rising inventories and a widening demand-supply gap. Read, Current Crude Oil Turmoil Could Be a Precursor to a Bigger Crash.

With the US dollar (UUP) on the rise for a while now against all major developed (EFA) and emerging market (EEM) currencies, we’ve seen the currency war continue through 2015. Multinational firms continue to face the brunt of the currency war. With China (FXI) devaluing its currency, we may see other emerging market countries following, triggering a damaging currency race to the bottom.