Investors are concerned that there will be a US recession in 2016. Some economists believe that we are already on the verge of one. What do the numbers say? How far away are we from a recession? PublicDomainPictures / Pixabay
During the first weeks of 2016, investors have had to deal with a powerful bear market, including the worst January since 2009. A market is officially in a correction when stocks fall more than 10 percent below a recent high. As the numbers below show, the major indices have been in a correction for several weeks.
However, have we fallen into another US recession in 2016? In order for that to happen, the indices need to have fallen 20 percent below a recent high. How close are we?
Dow Jones Industrial Averages:
End of 2015: 17,425.03
Feb. 12, 2016: 15,973.84 -1,451.19 (-8.33 percent change this year)
52 Week High: 18,351.40 (-2,377.56 which is -12.95 percent below 52 week high)
S & P 500:
End of 2015: 2,043.94
Feb. 12, 2016: 1,864.78 -179.16 (-8.77 percent change this year)
52 Week High: 2,134.72 (-269.94 which is -12.65 percent below 52 week high)
End of 2015: 5,007.41
Feb. 12, 2016: 4,337.51 -669.90 (-13.38 percent change this year)
52 Week High: 5,231.94 (-894.43 which is -17.10 percent below 52 week high)
What is the Possibility of U.S. Recession in 2016?
As the numbers show above, the Dow and the S&P 500 are both over 12 percent below their recent high. The Nasdaq is more than 17 percent below its recent high. This shows that all three indices continue to be in an official correction, which has deepened since last week. However, none of the indices have reached recession levels, although the Nasdaq is getting close.
According to a Bank of America report this week, the odds of a U.S. recession during the next year is about 25 percent.
What Issues are Investors Watching?
- Most investors will be closely watching the first quarter 2016 earnings. They are currently projected to fall 5.5 percent. As recently as September, 2015, the corporate earnings for the first quarter of 2016 were projected to rise 4.8 percent.
- Investors will also be monitoring the price of crude oil. When it drops below $30 a barrel, the stock market tends to fall along with it, especially stocks in the energy sector. The higher oil rises, the better the stock market tends to do. Some OPEC countries want to cut production; others do not want limits. This has not yet been resolved.
- Research analysts will be charting the indices and individual sectors to look for anything that indicates which direction equity prices are moving. Below is an example of a chart that was released this week:
- Analysts are keeping an eye on inventories. A glut in any sector can indicate low sales which will eventually translate to reduced production, lower prices and, possibly, layoffs. This week, wholesale inventories fell, which is considered good.
- Investors will be watching for signals from the Federal Reserve about what they plan to do with interest rates. This week, Fed Chairwoman Janet Yellen testified before Congress that the Fed will move slower if the economy disappoints them. Currently, the Fed still believes that the U.S. economy is essentially strong, although the global economy does concern them. The Fed is hopeful that we will see a 2 percent inflation rate later this year, which is their goal. If the Fed is right about their projections, the stock market will turn around in the second half of the year. If investors believe the Fed is wrong, equity prices will continue to fall.
- Another area that will affect the stock market is job creation and the unemployment rate. This week, the unemployment rate dropped to 4.9 percent.
- Investors will also be looking for other signs that signify the market is turning around, or continuing to fall, such as consumer sentiment and retail sales. Today it was reported that January retail sales beat expectations, but consumer sentiment was at a four month low, so investors are getting a mixed message.
- Because this is a presidential election year, analysts will also be watching U.S. politics, since the results of the election could affect how robust the economy will be over the next few years, as shown in the chart below. You’ll note that at the end of the terms of office for the last three presidents, stock prices dropped during the election year:
Reports That Could Indicate if There Will be a US Recession in 2016
Significant Economic Reports in February
- 17 – Producer Price Index for Jan. 2016
- 19 – Consumer Price Index and Real Earnings for Jan. 2016
- 25 – Annual Volunteering in the U.S. report
Significant Economic Reports in March
- March 3 – Productivity and Costs for 4th 2015
- March 4 – Employment Situation for Feb. 2016
- March 15 – Producer Price Index for Feb. 2016
- March 16 – Consumer Price Index for Feb. 2016
- March 17 – Job Openings and Labor Turnover for Jan. 2016
- March 22 – Employment Situation of Veterans Annual Report for 2015
Market prices provided by http://finance.yahoo.com
http://www.breakingnews.com/ (Jan. and Feb. 2016)
Charts and statistics from: https://twitter.com/StockTwits
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