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