Inflation
This comes back to the Fed and maybe the bond market, but if there is complacency out there, whether in the bull or bear camp, it is that inflation is dead. It is not. It may be comatose, but not dead.

I sense that 2016 will bring with it more price gains in rents, big accelerations in health services, health care premiums, and wages. Core service sector inflation is already approaching 3% – imagine if the dollar stopped going up and commodities stop going down, as such preventing goods sector deflation from acting as an antidote?

Bottom Line
As I said on CNBC yesterday (yes, Joe, I am also a strategist), I am not looking for a down year for the S&P 500 but am cautious over the near-term (flat is the new up).

Since I do not see a recession, and you only get successive down years in a recession, I doubt therefore that we will suffer the ignominy of another retreat in the S&P 500.

That said, after seeing returns more than triple this cycle and price-to-earnings multiples above historical norms, it goes without saying that we have borrowed returns from the future in a very major way.

As was the case in 2015, if you are buying the market, be happy with the reinvested dividend comprising much if not all of your total return.

Again, like 2015, the key to doing better than that will involve agility, opportunism, more discipline than normal (as in raising and deploying cash at the appropriate times), and having concentrated positions in the right sectors (such as being long the U.S. consumer last year which would have garnered an 8%+ return).

In general, anticipate an environment where active will beat passive investment management. We had a taste of this in 2015; expect much more of the same this year.

As for the economy, I think we will be just fine, and there will be more of the “neither boom nor bust” cycle.

Consumer spending in real terms is up 3.2% on a YoY basis. New home sales are up 9%. Housing starts by 16%. And both auto sales and production are up 6%. So while still soft overall, keeping in mind how tight monetary policy is given the dollar strength, the restraint in financial conditions from the surge in high-yield credit spreads, and a still restrictive fiscal stance, the economy is doing all right.

The key will be when net exports finally stabilize and at what point the business sector will feel more comfortable over the outlook to start expanding. Not until these two areas start to gain momentum can we talk about the U.S. economy, in aggregate, reaching or exceeding a 3% annual pace.
Now that would probably justify multiples closer to where we are today, but is a trend that has remained elusive for a long, long time – we have not seen a “three-handle” on real GDP growth since 2005. Is that you, Godot?

I mentioned the high-yield corporate bond market so I will finish off there. This is where the best risk-reward opportunities may well reside for the coming year.

David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. The article is an excerpt from "Breakfast With Dave." For more information or to subscribe to Gluskin Shef economic reports, visit www.gluskinsheff.com.

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