The experts at Goldman Sachs have begun rolling out their outlooks for 2016.
In a client note on Thursday, they outlined what they believe will be the top ten themes across global markets in the new year, which inform their various forecasts for the stocks, bonds, commodities, currencies, and everything else in between.
“Growth has consistently disappointed over the past several years, but this has not prevented risky assets from increasing substantially,” the strategists including Charles Himmelberg wrote. “In 2016, we expect activity to continue to expand in the advanced economies, led mostly by the consumer.”
For stocks, Goldman forecasts that the S&P 500 would end next year at 2,100, implying only a 5% return from current levels. And, betting on the US dollar, and against the Euro and the Yen, is Goldman’s top trade recommendation for 2016.
The themes reiterate some of the same big discourses of 2015, like monetary policy divergence, lower-for-longer commodity prices, and modest S&P 500 returns.
These are the ten themes from Goldman’s report.
1. Stable global growth
The strategists project that global GDP will rise to 3.6% next year from an expected post-crisis bottom of 3.2% in 2015. This should calm concerns that developed markets are stuck in ‘secular stagnation’, or slow growth with little investment and excess saving.
They wrote, “for investors, the relative stability of the growth outlook for both DM and EM economies should be sufficient to offset concerns about the downside risks implied by this year’s slowdown in global manufacturing activity, tightening of US financial conditions and prospective rate hikes by the Fed.”
Source: Goldman Sachs
2. Lower inflation, but not by as much as expected
With the unemployment rate at a seven-year low of 5%, inflation is not likely to fall by as much as markets have priced in. That’s because labor-market slack is less, and the unemployment rate is dipping to a range that would push inflation higher.
“As US unemployment rates reach our forecast of 4.6%, we expect to see an unwind of the deflation premium that is still priced into rates and inflation markets,” the analysts wrote.
“In sharp contrast to the loose intuition that ‘low commodity prices are deflationary’, commodity-price inflation could easily exceed 20% next year,” they forecast.
Source: Goldman Sachs
3. Sustained monetary policy divergence
“While one of the lessons of 2015 is that the Fed will likely be cautious about giving a green light to large and rapid US Dollar appreciation, the resilience of the US economy in the face of the substantial Dollar appreciation since mid-2014 gives us confidence that the Fed will ultimately tolerate further Dollar strength as it tightens policy through 2016,” the analysts wrote.
On the other hand, the European Central Bank and the Bank of Japan would still be dovish amid the “fragility of their recoveries”.
Source: Goldman Sachs
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