Market outlook: Investors expect continued growth for 2015
NEW YORK – Can the U.S. hold everyone else above water? That is the question investors are asking as Wall Street heads into 2015.
A strong U.S. economy helped propel the stock market higher in 2014, continuing a bull market that is on pace to celebrate its sixth birthday in March. On more than one occasion, investors dumped stocks following geopolitical flare-ups and concerns about the global economy, only to jump back in when an economic report or results from a big company suggested the U.S. economy was still resilient.
This bull market may be slowing down, but it still has had a remarkable run. The Standard & Poor’s 500 index has more than tripled from its March 2009 low.
Wall Street strategists, who typically are bullish on the U.S. stock market, expect the advance to continue into 2015.
Here are the major themes investors will need to watch:
Solid, not spectacular, again
2014 has been an above average year for stocks, but Wall Street forecasters expect more modest returns next year. On average, strategists forecast the S&P 500 will be up roughly 6 to 8 percent, with most of the gains coming from large multinational companies that would benefit greatly from an improving U.S. economy. Although there are risks that U.S.-based companies’ international sales could slow because of weakness in Europe and Asia, strategists believe U.S. growth will make up for that drag.
While U.S.-based companies do roughly half their sales outside the country, profits are still largely driven by the American economy.
The U.S. economy is expected to grow 3.1 percent in 2015, accelerating from the 2.2 percent growth it is expected to have this year.
This is a mature bull market, strategists say, so stock prices are relatively high and the possibility for volatility is even higher. Investors are paying roughly $17.50 for every dollar of earnings companies in the S&P 500 generate, the most they’ve paid for stocks since 2010. On average, investors pay around $15 for every $1 of earnings.
These high valuations could make investors more nervous about holding stocks if prices continue to climb. The stock market fell nearly 10 percent in October, its first major sell-off since 2011.
“Expect more pullbacks or corrections,” said Liz Ann Sonders, strategist for Charles Schwab.
Slow rate hikes
For several years, the Federal Reserve had been buying bonds to both keep interest rates low and boost stock prices. The program, known as quantitative easing, was designed to make bonds seem more expensive than stocks by suppressing the yield on bonds. It was also designed to make it less expensive for consumers and businesses to borrow.
That program ended in October, but it doesn’t mean the nation’s central bank has stopped helping out investors. The Fed has kept its key interest rate near zero since December 2008. Strategists believe the time has come for the Fed to start raising interest rates because the U.S. economy has improved enough to withstand higher borrowing costs. This phenomenon is going to have a huge impact on where the stock market goes in 2015.
“I see the Fed starting to raise interest rates in June, and it’s going to be a gradual increase,” said Russ Koesterich, global chief market strategist at Blackrock. “Investors are ready.”
Generally, strategists see the Federal Reserve raising its key interest rate, officially known as the Fed funds rate, from zero to 1 percent next year, in gradual increments of 0.25 percentage point each.
As interest rates rise, investments such as bonds will pay higher yields. If bonds are earning more, stocks will have more difficulty looking as attractive as they once did. That could make it more difficult for the market to go higher.
Oil prices
The collapse of oil prices this year has become a huge topic of worry as well as a comfort for investors.
American consumers love that falling oil prices have driven the price of gasoline below $2.50 a gallon. Wall Street’s relationship with oil is far more complex, however. Oil revenues are critical for several large economies, including Russia. Banks loaned money and energy companies issued high-yield bonds to investors based on projected oil revenues. Energy companies are reliant on high crude prices to make money and to keep their stock prices high. Shares of energy companies in the S&P 500 are down 10 percent this year. Many junk bonds are trading at distressed levels.
There’s worry that oil’s drop could shake up the global financial system. Russia’s currency, the ruble, has slumped because investors are concerned the government could default or the country could slip into a recession. In 1998, Russia defaulted on its debt, in part because of plunging oil prices.
The big question for next year is whether the world is simply producing too much oil, or whether the global economy is not strong enough to consume it fast enough.
Bond yields
The biggest prediction of 2014 to fall flat on its face was that bonds would have a bad year in 2014. They didn’t; in fact, they went in the opposite direction.
Instead of the 10-year U.S. Treasury note going from 2.97 percent at the beginning of the year up to 3.5 percent, as many predicted, the note was yielding 2.18 percent as of Dec. 22.
Many strategists admit they missed on their predictions. Nevertheless, many investors are doubling down on their bond yield forecasts for 2015, with some looking for the 10-year yield to reach 2.5 percent to 2.75 percent next year. They reason that the U.S. economy is improving and the Federal Reserve is expected to raise interest rates.