The US is the most straightforward of the investment regions of the world.

We’ve arguably made the best recovery from the deep recession caused by the financial meltdown of 2007-08 (China is the other possible candidate).  Real GDP in 2016 will be close to 15% higher than the previous pre-recession peak.  We’re also unique among major nations in the world in being about to make the first baby steps to bring interest rates up from their present emergency-room lows.

That’s the good news.

GDP growth

The other side of the coin is that the trend growth rate for the US economy is now much lower, at about +2% per year, than it was at the end of the last century.  That’s mostly a function of the aging of the population, something the Fed had begun to talk about, but few had noticed, in the 1990s.

We’ve now entered year seven from the economic low point in late 2009.  So I think it’s hard to make the argument that there’s lots of recession-induced pent up demand still waiting to be unleashed.  As a result, it’s also difficult to make the case that overall economic growth in the US in 2016 will be higher than 2% real, meaning maybe 4% nominal.

S&P 500 earnings growth

Publicly traded companies tend to be the best and brightest of those operating in the US.  Their profit growth should be somewhat higher than the norm, say, +7%.

Two factors suggest that the overall tally won’t be higher than that:

–the S&P 500 provides little exposure to autos or construction, two of the faster growing components of the economy, and

–it’s hard to figure what will happen in the energy sector, which, despite its recent poor performance, still accounts for 7.1% of the S&P 500 index.

in a perfect world, growth could be higher, but…

Growth could be substantially higher than that, were the two major political parties not so economically dysfunctional.  Partisan bickering an patronage politics probably subtract 1% from the country’s growth potential.   Arguably, Washington has always been like this and it’s just more noticeable today because of the aging of the population and the fact that inflation is near zero.

look for beneficiaries of structural change

Underneath this relatively calm surface, however, there’s lots of structural change taking place.

–Millennials have replaced Baby Boomers as the largest segment of the population.

–The internet is continuing to create new businesses and disrupt old ones.

–Both Boomers and Millennials are migrating in large numbers–the former toward warmth and away from high taxes, the latter toward large urban areas.

It seems to me that these are the kinds of areas where outperformance will be found next year.  That would imply another year of growth stocks outdoing their value counterparts.

interest rates

The effect of higher interest rates?

The most important point, I think, is that rising rates are unlikely to affect the patterns of out- and underperformance by much (personally, I don’t think there’ll be any effect).

The facts that the pace of rising rates is likely to be glacial and that the advent of the process has been as well-advertised as Star Wars …and over a longer period…suggest than any negative effect on stocks is likely to be mild.