As the world turns…time marches on…pick your cliché, but 2015 is shaping up in many ways to start up right where 2014 left off. Geopolitical Risk? Check. Moderate U.S. economic growth? Check. Stagnant European growth? Check. Positive U.S. stock gains? Check.
Of course it’s not exactly the same – it never is. Look no further than the oil patch for evidence of how quickly things can change in a 12-month period. Every year brings its own unique characteristics to the table but as we start out 2015 we’re bringing some positive mojo from 2014 with us.
Now, there are any number of money managers and strategists out there who would like to ascribe the stock market’s performance over the past five years solely (or at least predominantly) to the Fed’s loose monetary policies. The correlation is certainly there. Then again, the correlation is also high between stock gains and the growth of the economy and corporate profitability.
Now that the Fed is no longer practicing easy money and is looking to actually raise the Federal Funds rate in 2015, we should get a clearer cause/effect picture. I happen to think that corporate profitability and margin expansion (investors willing to pay more for a certain level of earnings), were the likely impetus to stock performance with some boost from the Fed.
So what may happen in 2015 for U.S. stocks? As with 2014, our stock market will continue to be the best game in town, at least among larger markets. Since the middle of 2012 U.S. stocks have been on a steady ascent despite many predicting their imminent demise.
This year, there might be times where other markets present themselves as better tactical trades, but for the longer term investor, the hard slog upward we expect in the S&P 500 for the year is the right place to be throughout. The strengthening dollar will hurt some multinationals and rising rates could hurt some smaller companies. But in general, the economic and interest-rate environment is a net positive for extending gains in U.S. stocks.
I can’t leave you without some potential headwinds to the above predictions, so here are a few things that may dampen the markets.
1. Lower oil prices are a plus to the overall economy but not for the oil and energy industry, nor are they likely to help capital spending- as there is no immediate need to develop new oil fields or iron ore mines.
2. Decelerating growth overseas means that while world GDP may equal or exceed U.S> growth rates, growth in the developed parts of the world will remain subpar. Europe will likely stay out of recession courtesy of lower oil prices, but Japan will struggle to stay in the black. China will continue to grow, but weak manufacturing and infrastructure spending almost certainly mean slower overall growth. Latin America is a big question mark hurt by both lower commodity prices and by unstable political backdrops in key countries (Brazil, Venezuela and Argentina).
3. And finally, the transition from very accommodative monetary policy to normal monetary policy sounds relatively simple but it rarely is. The U.S. will be first to make the transition. Already the combination of declining oil prices, widening interest rate spreads and a strong dollar are creating havoc in some emerging markets.
Provided by Ed Wettig, CFP, Wettig Capital Management which offers investment management, financial planning and retirement income strategies. Securities and investment advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC and a Registered Investment Advisor. Wettig Capital Management is independent of Royal Alliance Associates, Inc. and not registered as a broker/dealer or investment advisor.