The consensus on Wall Street remains that the US economy grew about 2.5% in 2015 and will post similar growth this year, notes Elliott Gue, editor of Energy & Income Advisor.

The median forecast at the Fed is that current weakness in US inflation figures is temporary and largely due to transitory factors like the plunge in energy prices.

The median forecast from Fed policymakers is that the Fed Funds rate will reach 1.4% by the end of this year, suggesting at least four rate hikes this year.

We see significant downside risk to that outlook. In fact, the central bank may have to reverse course and start cutting rates once again by early 2017.

The widely-watched Manufacturing Purchasing Managers Index is below 50 for the second straight month. The sharp deterioration in this index since the summer of 2014 suggests this segment of the US economy is already in recession.

Meanwhile, most stocks are already in a bear market. At year-end, only 30% of stocks traded on the NYSE were holding above their 200-day moving averages and the average stock in the S&P 500 closed the year down nearly 20% from its 52-week highs.

Put another way, the 20 stocks with the highest weighting in the S&P 500 were up an average of 13.7% in 2015, while the other 480 stocks in the S&P 500 were actually down 1.06% for the year.

Weakening economic growth and deteriorating market breadth point to rising risk of recession in the US by early 2017 and a bear market sell-off of 20% or more for the S&P 500 this year.

In that environment, investors will gravitate to the safety of US government bonds such as those held in the iShares 20+ Year Treasury Bond ETF (TLT). Bottom line: We see the government bond market outperforming the S&P 500 (SPX) in 2016.

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