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we're speaking today with Jeremy seagull
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A Wharton Finance Professor about the
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outlook for markets in 2016 welcome
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Jeremy thank you for joining us happy to
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be here and happy New Year Happy New
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Year to you although not not so happy in
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the stock market today well let's talk
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about uh a couple of things one is that
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2015 was the worst for stock markets in
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since 2008 uh the Dow Jones and S&P 500
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indexes basically were flat they they
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lost a little bit but basically we flat
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so that is a Lis performance in in quite
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a while uh so I wanted to ask where you
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see them going in 2016 but then as we
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get up this morning we have these issues
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in China a suspension of trading a drop
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of 7% in the stock market there so uh
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the these are all connected so let's
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talk about the short term and then we
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can talk about the long term one thing I
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think is pretty interesting you know the
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worst in what six seven years and it's a
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flat Market that's not bad bad right I
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mean it shows how many up markets we
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have had over the last seven years that
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the worst is uh slight negative on the
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index and if you add the dividend return
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actually a very slight Pro positive one
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um and the the major reason for that and
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we touched on this you know in uh you
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know August last year that we had a
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tremendous drop in earnings uh
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unexpected uh both on the rise in the do
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and the collapse of uh Energy prices and
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uh so the earnings were way way below
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estimates and and actually not a bad
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stock market performance uh given the
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decline uh in earnings that we had and
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so um I think that the projections are
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that earnings the upcoming reports
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aren't going to be great either and now
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we have this wrinkle large or small with
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China at the moment um so what do you
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see it's a tough it's a tough call for
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2016 yeah well let's get to the real
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short run I mean the China thing
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uh a circuit breaker at 5% for a
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volatile Market is way too small uh and
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there's also fears that there's the
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there's the big lockup they prevented
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insiders from selling stocks for six
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months that's going to end on Friday and
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there's a you know whenever something
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bad happens oh my God there's going to
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be millions of shares sold on Friday and
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then it just does I get out now before
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the circuit breakers come in it's a mess
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they've just not you know we all know
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that they've handled the market really
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bad
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um and um you know it's it's it's an
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important Market of the world and uh I
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think that that certainly uh contributed
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to the declines we saw today do you
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think that that that the situation in
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China is not quite as bad as the market
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suggest today and that it's sort of
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technical things that are making it
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overshoot on the downside well you know
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the the market always overreacts I mean
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how will how much will GDP go up I mean
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uh you know I I heard you know on CNBC
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some forecasters saying as low as two or
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3% for this year which would really be a
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shock but most of the people that I talk
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to that have used it said maybe it's
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five um and yeah that's a come down
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still not a disaster we wish we could
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get uh anywhere near that figure right
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okay um so then let's look forward let's
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look into the first quarter first half
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and and the whole year the whole year
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what are you seeing well I you know
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there's a lot pessimism now I mean if
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you take a look at bulls and bears and
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how it is wow there's a lot of downbeat
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on the market I don't think it's going
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to be as downbeat um first of all I
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don't think the FED is going to tighten
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as much as many observers fear right now
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I mean a lot of people calling for four
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tightenings some even think more I don't
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think so I really think it's going to be
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two tightenings um on around that level
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uh so I I I think that that's going to
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be a positive in the market once they
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realize oh my goodness you know the FED
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is not going to tighten that much uh Hey
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at that particular point you look at the
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valuation of stocks and they're very
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even though they're high from a
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historical basis they are not high
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relative to current and prospective
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interest rates and I think that that
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realization will bring some money back
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into equities this year so where would
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you see the indexes at the end of the
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year I I think we can do 10% this year
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um you know uh again we were flat last
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year I think earnings are going to rise
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about 10% uh a little bounce back from
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about 7% drop that we had this year and
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with the earnings increase and the fear
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fears being allayed on how aggressive
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the FED is I can see you know we would
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be at the same price earnings ratio then
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uh for a 10% move uh in the market this
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year what do you see as the uh major
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positives and the major threats to the
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US economy for 206 16 well I mean the
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the positives is I think as I mentioned
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I don't think interest rates are going
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to be a threat in fact they're going to
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be less of a threat than many people
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think so that's going to turn out on the
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positive side uh I also think that
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earnings are going to recover we had a
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tremendous decline in particularly
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energy earning sectors and they're going
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to recover the threats are my goodness
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there are people still calling for $20
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oil and although again you know we've
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talked about this issue a drop oil
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prices is good net for the US economy
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although not as good as it used to be
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because we're almost balanced in terms
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of imports and exports with our
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tremendous increase in Shell production
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over the last five years but uh
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nonetheless the S&P 500 is not just a US
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index it's way more heavily weighted
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towards energy the manufacturing
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companies that Supply the energy
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companies like Caterpillar and others in
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Slumber with all the drilling equipment
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and all that and they are definitely
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hurt and marking down also the fact that
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the strong dollar although it helps us
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in terms of imports is is very
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challenging for those companies that
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sell abroad and bring back uh euros and
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Yen that are worth less than dollars and
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that's another reason for the hit uh in
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earnings so again oil prices down is not
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going to be good for the earnings of the
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S&P 500 even though it's not going to
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have uh you know a big negative effect
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on on the us consumers how about places
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like Europe and China they would benefit
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of course from low these lower oil
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prices China is a net importer India is
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a that importer by the way India is you
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know growing
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78% uh now really faster than China it's
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the oil producers in the emerging
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markets that have been hit the most so
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if we uh uh you know again what happens
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uh on on on you know what's going to
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going to happen on oil and China is a
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big story about by the way what happens
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on oil uh uh unquestionably if we get a
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big slowdown in China oil will continue
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to be under pressure in
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2016 what are the chances um that the
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relatively positive picture for job
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growth in the US in
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2015 will finally lead to some real wage
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growth in the US which has been lacking
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for some would say for decades uh when
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you account for inflation and also uh
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connected to that a real investment by
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corporations in in into increasing
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production expanding in some way well
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one thing we should realize is that one
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of the biggest disappointments over the
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last four or five years we've had a
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really good increase in the number of
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jobs but productivity growth GDP growth
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has been very poor and I say you know
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people say well it's two and two and a
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half percent but that's the trend rate
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uh We've that's if you had no increase
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in jobs and we of course had have had a
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net increase in number of workers over 2
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million a year over the last three years
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we should be producing 4 and a half 5%
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growth rates in Real GDP we don't
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completely understand the reasons for
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the productivity
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collapse um uh part of it is more
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regulations um part of it is maybe a
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mismeasurement of uh prices so many
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things are now free because of our cell
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phones and our apps and everything and
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and if they're free they're not in GDP
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because GDP is price times quantity so
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uh there's there's some people and I'm
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one of these included that think that
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there's there's actually more deflation
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going on than people think when you
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actually take into account all the
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things that have sort of gotten free
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over time which means we're understating
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real GDP and understating the growth of
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of real wages uh so there's some
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measurement problem uh there may be some
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compliance problem and and and
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regulation problem it's it's not
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completely understood we get if we get a
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bounceback in that productivity you will
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see a bounce back in the real wages is
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this connected in any way to the labor
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participation rate because it's great
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when you see jobs increasing and so
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forth but when you compare it
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historically to you know the percentage
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of workers in the US that are employed
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which is which is in a way a more
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long-term measure um we're still I mean
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we're still kind of struggling back to
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where we were before the financial crash
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and and I think we're at actually we're
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at record low
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I mean the participant participation
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rate has continued to fall and you're
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absolutely right Fallen much more than
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we would expect it now we do know the
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participation rate will be falling
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because the baby boomers are going into
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the retirement period now but it is
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falling about twice as fast as most
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economists say it should be
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falling why people are quitting the
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labor force uh there's a lot of
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speculation but that's one of the things
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that has put pressure on the
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unemployment rate actually one of the
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things that I want to see we're going to
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have a jobs report Friday and of course
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every month uh we we have that jobs
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report if we could get the participation
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rate to stabilize or even move up in
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2016 that would take a lot of pressure
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off the FED moderate any sort of
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increases they would have and that would
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be a very positive uh development for
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the US economy what do you think the
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odds of are of that happening I I'm I'm
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not sure um it keeps on surprising us
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again on how poor is I mean with a good
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labor market un appointment rate of 5%
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one of the lowest in the developed world
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I mean we should see more people saying
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hey you know what there are job openings
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out there why aren't they coming back
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you know uh into the job market and it's
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not just low wage jobs Etc and so on we
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don't understand all the reason people
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change an attitude about workers and
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double income families and uh comp
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there's a very complicated Dynamic
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that's going on also the idea that this
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unemployment rate at 5% or whatever it
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is doesn't really capture the number of
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people that are outside the U6 which
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includes those disc but that's gone down
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a lot too I mean that's gone down for
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that fell below
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10% uh again so we've really reduced
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even the discouraged workers of
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marginally attached workers the workers
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are working part-time instead of
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full-time all those have also seen a
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dramatic decline we've done a really
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great job there still have not been able
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to coax people back into the labor force
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and just to note that um as bad as you
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say things are with that number in the
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US it's I think it's even worse in
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Europe so they're suffering from the
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same thing yeah well they they have the
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I mean the participation rates first
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they have you know many of them have
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much earlier retirement age and much
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more generous pension
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promises and uh unemployment insurance
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is automatic for them while for us it
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isn't automatic uh there's a lot of
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differences that make ours a much more
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flexible
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uh labor market than in Europe what
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should what signals should we take from
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the big dip that's happened in high
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yield yeah bonds the I think almost all
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of that is the energy sector uh if you
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take high yield off the energy sector it
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is only a very modest weakening so
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basically you know the collapse in oil
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prices and there was a lot of debt
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associated with that uh you know the
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master limited Partnerships at DES
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faster that that occurred last year
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people thought that they had a safe
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income vehicle and uh you know those PES
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have been crushed 70% or more that I
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mean that that has hurted I do not think
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that you know we're going to you know
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see a weakening of the high yield Market
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this year in fact there's probably some
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good values right now in that market so
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you would disagree with those who say
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this could be the canary in the Coline
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that's suggesting there's some
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underlying weakness in financial markets
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that this is this is yeah and it's good
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to do that because those credits are I
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mean you know we take a look at what you
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know the financial crisis 20078
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financial crisis we saw the
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deterioration of those but that was much
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more endemic I mean high yield were
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owned by you know everybody this is just
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the energy credits which by the way the
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banks are not in at all this is very
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very important in contrast to 2007 and8
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uh uh the banks you know basically were
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were not going to any of this financing
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of these uh uh oils there was so much
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money on the sidelines that went in
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directly they didn't have to go to the
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banks the banks are very very sound at
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this uh at this juncture uh we touched
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on this earlier but I'd like to get a
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little bit more of your thoughts on how
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big of a threat is deflation we know
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that with China's slowdown commodity
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prices have plummeted it's not just oil
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it's copper it's everything almost
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everything almost everything um and I
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know that there's also we're at the end
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of a major cycle pricing cycle inise but
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now with China doing this uh pullback um
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it's it's causing a tremendous effect so
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where are we with deflation Europe seems
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very vulnerable China seems vulnerable
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and if they were to devalue again for
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example which what they are there I mean
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we saw tremendous weakening today in the
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value and it it looks like it wants to
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be weaker and yes that does export
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deflation and yes I think Janet Yellen
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is going to have difficulty meeting her
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2% Target and yes that's one of the
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reasons why I think we're going to have
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very moderate uh increases in the rate
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this year but not something that's going
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to spin out of control it's not I I
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don't see most of the experts actually
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Point again what happens to oil I mean
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oil goes down to 20 that's another leg
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down but if we get stability in oil if
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you look at the core rates of inflation
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they're they're they're not quite at two
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but they're much closer to two and they
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don't really show a sign of substantial
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weakening so uh I still don't think
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deflation per se but hitting the 2%
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Target might still be a challenge and if
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the economy in the US performs or the
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stock market performs the way that
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you're suggesting it will uh that's
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going to help the world economy in
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general but there are people out there
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that are saying the world economy could
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already be in a recession or or
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certainly that one is ahead what's your
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feeling on that well the Emerging
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Markets are the most challenged and of
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course those that are producers of of
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these Commodities under more actually
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Europe is looking better than it did a
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year ago um and the US is no is is not
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really looking weaker I mean looking
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into this year I still see two to two
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and a
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half% uh and we'll see what happens it's
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you know we see the labor force and and
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the productivity again not great for uh
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a good labor market growth because of
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that productivity features and Japan has
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not you know abish shinzo's plan for
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Revival has been very slow and coming
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off but uh I don't see a recession there
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uh the Emerging Markets are the most
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challenged of of the group and since
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their in internal growth rate is so much
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higher again a recession in China is 3
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to 4% GDP growth so um and as I say
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India still looks very very strong so I
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I I I don't see World recession
00:16:25
2016 thanks very much for joining us
00:16:28
happy to be
00:16:40
[Music]
00:16:51
here
