I believe low commodity prices will put pressures on emerging markets, and capital will continue to flow out of foreign markets. Rising rates will strengthen the dollar to critical levels which will put pressure on governments in emerging markets who borrowed in USD. As they default, this will begin to pull down the foreign equities. As a result, investments may continue to flow into the American market. This could also cause an overshoot of my .
Why will a strong US Dollar will crash the market?
Very Simple. Energy prices are low right now, and billions were borrowed in order to extract oil . As the dollar strengthens, global economies may weaken, and this may make it harder for these oil companies to find buyers. (less business being conducted equals lesser need for oil ). This will in turn will lower demand for oil pushing the price down further (A spiral if you will). These defaults will lead to ripples in the economy which could result in massive layoffs and other social unrest. As Assets sell off, this could lead to economic deflation, thus a recession is born!
How bad will the market sell off be?
Besides energy, other areas of the economy seem fine for now. I think the S&P selling off to 1550 points in 2016 is very reasonable.
The only reason the US interest rate is raised btw is to correct inflation and reach the inflation target of 2% IMO...FEDs will calibrate to reach this target. An increase in interest rate is a sure sign of a healthier economy - and not so much more.
Cheap oil will have a short run positive effect on consumer staples and discretionary, in America. Do not forget that alot of these companies make substantial portions of their profits selling goods overseas. Those countries rely on commodity exports for alot of their wealth. Therefore as commodity prices plunge, they will have less money to spend, thus there will be less consumer discretionary spending, which should reduce the profits of many multinational corporations.
The second effect of cheap oil is that it WILL lead to hundreds of defaults on billions of dollars of debts in the Energy sector. Is this not at ALL disturbing to you? As these companies default, a large amount of people will lose there jobs. Many states in the south will experience the Energy Crisis much early than the Northeast. These people will spend less money, and maybe default on their personal debts, etc. These effects then ripple through the economy, etc
The third effect of falling oil and falling commodity prices coupled with rising rates is a strengthening US dollar. A lot of sovereign nations borrowed money denominated in the US dollar. As the US Dollar strengthens, it becomes harder for these countries to pay there debts, thus defaults should occur. Defaults in emerging markets should lead to a contagion effect in global equity. Don't forgot that the US market IS correlated to the performance of global equity.
Again regarding the strengthening of USD, don't you think this has already been for sure well thought through before the FEDs actually decided to increase the rent.
Anyway time will tell:)
..And btw I am an Norwegian, and as you might know we export a very large amount of oil. Lots of lots engineers have lost their jobs, still we're holding steady against other currencies as USD, strange isn't it:s