We’re deep into the year’s first quarter, and it’s time for some predictions to guide investing. Such as: U.S. growth more muted, others weak, stocks up, inflation still low, interest rates up, tech on fire.
Of course, forecasts have a disturbing tendency to look foolish in retrospect, so we go about this exercise with all due humility.
If we look into our economic history books 10 or 20 years from now, how might 2014 be remembered? Maybe as, “the year that oil prices crashed, despite a strong U.S. economy.” Few saw that coming. Or perhaps, “the year when nearly every economist on Wall Street predicted a rise in interest rates that never came.” It could even be (my personal favorite), “the 2014 bull market that nobody loved.”
Whichever way it’s written, the point is that it’s now history. What I’m more interested in is what we can expect from 2015.
My firm’s investment committee has homed in on what we believe will be the 10 most impactful themes for investors over the balance of the year.
- The U.S. economy. The economy will slow from the decent pace that closed out 2014, but not completely fall apart. Most likely it will be sufficient to keep corporate earnings and profits growing, and the unemployment rate headed to below the current 5.7%. However, with Japan in recession and the European Union on the verge of one, the U.S. can’t completely decouple from other economies forever. Look for a solid 2015, but not a runaway train.
- Stocks over bonds (again). The bull market in stocks is now more than five years old, but bull markets don’t end without a major economic event, i.e. a U.S. recession. Remember that a recession is negative growth for two full quarters. With the 13.7% surge of the Standard & Poor’s 500 in 2014, combined with low energy prices for consumers and companies alike, it’s likely we’ll see stocks continue to rise. On the other side of this coin, as interest rates make a push higher in 2015, bonds in general encounter a headwind – making a flat year for bonds likely. As rates move higher throughout the year, bonds may look attractive again in late 2015, with higher interest rates.
- Interest rates finally climb. This is something that we have expected for more than a year now. The Federal Reserve is done with its bond-buying stimulus program and its chair, Janet Yellen, already foresees a rate rise as early as mid-2015, it is likely that we will see interest rates in more normal territory. This means rising to the 3.5% range for 10-year Treasury bonds – now at 2.06%
- Less smooth sailing for stock prices. Yes, we almost saw a full 10% market correction last fall, but we spent much of the year with relatively low volatility. This means stocks prices didn’t jump around much. The Chicago Board Options Exchange Volatility Index is now at a relatively quiet 14.5, but has been as high as 25. Traders view anything below 20 as calm. As the economy adjusts to higher interest rates in 2015, stock market volatility will likely pick up.
- Ultra-low inflation. With the precipitous drop in U.S. oil prices beginning at the end of 2014, lower energy prices will continue to filter through the entire economy. Manufacturing costs will decline, what consumers pay for gas at the pump will stay low, transportation, shipping, construction and petroleum-based products will all moderate, driving the consumer price index closer to a very low historical rate of 1%. Core inflation, which is without energy and food, was 1.6% for the year through December.
- Sectors to watch. Lower oil prices and a solid U.S. economy should bode well for the consumer discretionary, financial, health care and technology sectors. These areas have historically performed well, relative to others, in the year following a large decline in oil/energy prices.
- Housing stays steady. The millennial generation is expected to spend $1.6 trillion over the next five years on home purchases, according to the Conference Board. This will continue to support housing prices as they move out of their parent’s basements and start owning homes of their own. Meanwhile, housing continues its slow recovery, as the National Association of Realtors’ pending-sale index rose 6.1% in December over the year before.
- Drama in the Middle East and Russia. Dramatically lower oil prices will continue to take a toll on oil-reliant economies. Saudi Arabia will produce oil regardless of how low prices go, but can only fully fund its suite of rich social programs with oil at $82 per barrel, by Reuters’ reckoning. Likewise, the Russian economy needs oil above $100 for a balanced budget. This means, most likely, both regions will see unrest as their citizens adjust to more economic strife.
- European recession. With aging demographics and restrictive labor laws continuing to plague many European Union nations, a full-blown recession there is likely in the coming year.
- Tech like it’s 1999. Unlike the late 1990s, startup tech companies are now actually expected to generate revenue and have the true potential for profit before garnering a sky-high valuation. However, with the (still private) ride-sharing service Uber boasting a $41 billion valuation, the price tag for other companies like Instacart are beginning to seem astronomical. Instacart is a wonderful idea and service (which I’ve written about before). But the grocery delivery service’s still relatively small footprint seems hardly supportive of a now $2 billion valuation. This tells us that startup-chasing venture capital firms are beginning to create an environment reminiscent of the late 1990s. Look for the tech startup bubble to continue to inflate in 2015.
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Wes Moss, CFP, is the chief investment strategist for Capital Investment Advisors and a partner at Wela, both in Atlanta. He hosts “Money Matters,” a live financial advice show on Atlanta’s News 95-5 and AM 750 WSB Radio. In 2014 Barron’s Magazine named him as one of America’s top 1,200 Financial Advisors. His newly released book, You Can Retire Sooner Than You Think published by McGraw Hill, is available on Amazon, iTunes and at your local bookstore.
Wes writes weekly about personal finance in the “Bargain Hunter Section” for AJC.com, the site of The Atlanta Journal-Constitution. Wes is also the editor and writer for About.com’s Personal Finance blog. Connect with Wes on Twitter at @WesMoss365 and on Facebook at Wes Moss Money Matters. You can also visit his website, WesMoss.com to learn more about Wes, and take his complimentary Money and Happiness Quiz.
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