During the opening week of 2016, the U.S. stock market appeared to be taking its directional cues from the Chinese stock market. This observation overlooks the fact that investors are starting to take notice of prevailing mixed signals emanating from the U.S. economy. We are both impressed but also somewhat mystified by the existing fabric of the U.S. economy.
For instance, while the pace of Job creation and light vehicle sales continues to be quite strong, industrial production and retail sales are simultaneously much less so. On the one hand, auto sales posted an annual sales pace in excess of 18 million units for three consecutive months between September and November, which is unprecedented for the U.S. economy.
But on the other hand, U.S. industrial production has nearly been in a constant state of decline since peaking in December 2014, suggesting that the industrial portion of the economy may actually be in the midst of a mild recession.
U.S. retail sales are another area displaying divergent economic data. The year-on-year growth rate of headline retail sales has slipped below a two percent growth rate the last two months, which could be suggesting growing risks of recession for the U.S. economy as it approaches a potential stall-rate of expansion.
But if we exclude both the negative influence of declining gasoline service station sales, and the positive influence from historically strong auto sales, the resulting growth rate of more core retail sales is much healthier at 3.4% in October and 3.6% in November.
We believe that 2016 should be a good year for the U.S. stock market and risk assets generally as sustained healthy job creation continues to shore-up labor market conditions and consumer confidence. All of this collective optimism is predicated on a reversal at some point early this year of contracting industrial production and slowing growth in headline retail sales, which would alleviate simmering concerns that the U.S. economy is in the process of slowing prematurely.
Nonetheless, however unlikely the prospect of a recession for the U.S. economy in the coming year, stalled GDP growth would introduce an entirely new set of global risk mitigation concerns that are not currently priced into global security valuations.