George Leong: 2014 Recap: What Will Affect the Economy in 2015?
Looking back on 2014, despite the elimination of quantitative easing and the pending rise in interest rates by the Federal Reserve, it’s clear that the bulls controlled the stock market.
In early December, things were looking rough. Stocks were threatening to move lower as the market focused on the economic stalling in China, Japan, and Europe, along with the political and economic turmoil in Russia that could kill the economic renewal in the eurozone and the global economy.
However, a positive that sets up well for 2015 is the renewed positive bias that emerged and drove the DOW and S&P 500 to new record-highs. The blue chips were sizzling in late December as the DOW easily blew above the 18,000 level for the first time on December 23. Blue chips closed up 7.5%, which was a big improvement over a month earlier.
In my estimation, the buying sets up well for the New Year as financial credit remains relatively easy and flowing, and the comparative yields on bonds are way too low to shift capital. Buying 10-year bonds yielding little more than two percent is not enticing for investors who have been seeing above-average gains since 2008.
The country continues to produce jobs at a rate of more than 200,000 per month in 11 of the 12 months in 2014. I expect this to continue into 2015. Excessive growth and downward pressure in the unemployment rate could drive the Fed to look at increasing rates earlier.
Oil continues to hold at the $50.00 range, but it could move lower. Saudi Arabia, the biggest member of OPEC (Organization of the Petroleum Exporting Countries), came out and said it would not cut oil production even if the price fell to $20.00 a barrel. The cartel is clearly trying to force production cuts in U.S. shale. We’re already beginning to see cuts in the capital expenditures of oil companies.
With the real possibility of oil falling below $50.00 a barrel, investors need to be careful when looking at energy stocks going forward.
I’m cautious and neutral on energy based on the current scenario. Of course, a revival in the global economic growth would help. The wild card will continue to be the production side, which appears to be in remission due to announced cuts in capital expenditure spending.
What’s Ahead for the Economy in 2015
The past year turned out somewhat close to what I was thinking back in January 2014, with the stock market trading characterized by uncertainty and hurdles.
I thought a gain of 10%–15% for the S&P 500 was in the works and this did, in fact, play out.
As we move forward, economically, the big question is what will happen in the global economy. Renewed growth in Europe and China could help to reduce uncertainty; however, Russia needs to deal with its chaos. Debt failure in Russia will kill the economy and impact Europe during this fragile time.
If the United States continues to see improvement in jobs, we could see higher retail sales and a push upward in U.S. gross domestic product (GDP). The 2014 third-quarter reading of five percent was impressive; this will hopefully help to drive corporate revenue and earnings growth.
The Federal Reserve will likely increase interest rates from the current near-zero percent. The central bank will likely increase rates by mid-2015, beginning with 25–50 basis points to gauge the market reaction to a rise in rates. Regardless, higher rates are coming, but I doubt they will accelerate rapidly; it will be more of a steady increase under the guidance of Fed Chair Janet Yellen, who doesn’t want to derail the economy.
My feeling is that the S&P 500 could trade up to 2,300 next year.
In the blue-chip space, the late “heroics” of the DOW were enough to save the blue-chip index from a muted year. The break of 18,000 was nice, but the market really is looking at 20,000. I feel the DOW could take out 19,000. My top areas are the financial, technology, and consumer cyclical sectors. In 2015, I will be watching stocks like Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), The Goldman Sachs Group Inc. (NYSE:GS), and JPMorgan Chase & Co. (NYSE:JPM).