GDP forecast slashed to 0.7%, while Dows debut a bad omen for 2016

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Just when you thought the U.S. economy couldnt get much worse than the 1.3% GDP forecast issued by the Atlanta Federal Reserve in late December, it did: On Monday the same bank slashed its fourth-quarter estimate to 0.7%!


The news couldnt come on a much grimmer day. After all, the Dow Jones Industrial Average got off to its worst annual start in 84 years Monday by losing as much as 450 points in the wake of a crash on the Shanghai stock market. The carnage was mitigated only by late-session buying.

Meanwhile, the S&P 500 has just as bad of a day. It has opened lower on the first opening day of a trading year on only two prior occasions, according to the Bespoke Investment Group.

This slow start does not bode well for 2016. According to analyst Mark Hulbert, the historical odds of a full-year gain when the first day is positive are 74%, compared with 51% when the stock market fell on the first trading day of the year.


The only things holding up the overall stock market, apparently, are a few winners among a legion of dreck. Calling 2016 the possible start to the emergence of the Stealth Bear Market, Jonathan Krinsky at MKM Partners noted that 2015 was all about a very small number of stocks having a great year, while the majority had a very poor year.


And is it going to get any better? The fourth-quarter earnings season is not looking positive. According to FactSet, earnings for the S&P 500 areexpected to have fallen 4.7% during the final three months of the year, Business Insider noted. It will mark the first time the index has seen three consecutive quarters of year- over-year declines in earnings since Q1 2009 through Q3 2009, FactSets John Butters added.

Back to the crummy GDP, though. Separate economic reports also issued Monday continue to suggest that the U.S. economy is on the cusp of another major slowdown. The Institute for Supply Managements factory gauge showed that manufacturing contracted in December at the fastest pace in more than six years as factories, hobbled by sluggish global growth, cut staff at the end of 2015, Bloomberg reported.

The manufacturing recession is now inevitable, Zero Hedge observed. The only question is when and how it will spread to the service sector and be recognized by the NBER.

Meanwhile, the U.S. Census Bureau reported that construction spending missed expectations of a 0.6% increase to fall 0.4%, the most since June of 2014. And moreover, in another blow to GDP, all construction spending data for the past 10 years has been found to be erroneous.

Finally, two year-end reports confirm that the U.S. economy is sucking on wind. The Dallas Federal Reserves general business activity index plunged to -20.1 in December from -4.9 in November, reflecting the implosion in oil prices in 2015. And the Chicago Business Barometer (or PMI report) unexpectedly plunged to 42.9 in December, itslowest reading since July 2009, Business Insider reported.

Given all these pessimistic economic data, no wonder the Feds vice chairman, Stanley Fischer, was recently talking up the central banks ability to impose negative interest rates to generate benign inflation and growth. And even ultra-liberal economist Robert Reich is warning that the U.S. economy in 2016 is on the edge of recession.

Burning Platform blogger Jim Quinn summed up the global situation in 2016 with this paragraph: The reckless herd has been in control for the last few years, but their recklessness is going to get them slaughtered. Corporate profits are plunging. Labor participation continues to fall. A global recession is in progress. The strong U.S. dollar is crushing exports and profits of international corporations. Real household income remains stagnant, while healthcare, rent, home prices, education, and a myriad of other daily living expenses relentlessly rises. The world is a powder keg, with tensions rising ever higher in the Middle East, Ukraine, Europe, and China. The lessons of history scream for caution at this moment in time, not recklessness. 2016 will be a year of reckoning for the reckless herd.

With GDP expectations falling, the stock market off to a bad start, earnings season looking poor, and the manufacturing sector all but in an official recession, the time to hedge your portfolio from potential losses in equities is now.

Where to turn? Gold and the miners will be the major winner next year as they will be the primary beneficiaries from continued low nominal interest rates, negative real interest rates and a watershed turn in the value of the U.S. dollar, wrote Michael Pento of Pento Portfolio Strategies in predicting bullions return to $1,250 and a stock-market correction of 20%.

Whether Pento is correct in his target price is unclear, but what is more certain is that precious metals have already corrected significantly from all-time highs, while stocks have hardly begun to lose ground. The choice is clear.