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The Market in 2015

Increasing Headwinds and Tailwinds

 

 

2015 is setting up to be an intriguing year in the stock market with increased volatility.  The headwinds and tailwinds are stronger than in the last 2 years in which we saw a gradually improving economy with very low interest rates, ideal for a steadily rising market. The main headwinds were international with China and Europe economies slowing.  Not surprisingly, the US market far out-performed most international markets in dollar terms.

 

So what are the headwinds and tailwinds which will affect the market this year?  A major tailwind is the ongoing improvement in the economy given a boost by cheaper energy prices.  However, this will only help the stock market to the degree that it boosts corporate profits.  A competing headwind is the strengthening US dollar which makes US products more expensive overseas and decreases revenue in dollar terms.  This would imply an advantage to companies that do the majority of their business in the US.  In general, this provides an advantage to many small/mid-cap, consumer, and transportation stocks over the big multi-national companies.

 

The strengthening dollar creates headwinds for international stocks whose currencies are losing value against the dollar.  An increase of 10 percent of a European stock is negated by a 10 percent decrease in value of the Euro.  With the European Central Bank providing an economic stimulus through their own version of Quantitative Easing (i.e. their central bank printing money to buy bonds), the dollar will remain strong and probably keep strengthening.  This will bring foreign capital into the US keeping our interest rates low and giving the US stock market a lift.  However, the higher dividend payouts of large European companies might be attractive to income seekers.

 

One of the most difficult areas to predict is energy prices. The price of oil is very sensitive to minor changes in supply and demand.  That is why the WTI price of oil was able to drop from 104 to 45 dollars a barrel in a few months.  While it’s impossible to predict how low prices will go, they should rebound later this year as lower prices strengthens demand and diminishes supply.  With current prices much below production costs of many suppliers, look for oil to rebound to about $70 a barrel by the end of the year (more if the Saudis cut production). The oil producers will continue to come under pressure so I don’t think we have seen the bottom of their stock prices (unless OPEC cuts production—a seeming unlikely event at this time).

 

Other potential market headwinds include turmoil in Greece and the threat of other countries leaving the Euro as well as other geopolitical events. However, as long as the US economy is growing, these events could represent buying opportunities.  Also, there continues to be a considerable amount of money which is not invested in stocks or bonds.  In the US alone there is 11.7 trillion dollars (the so called M2 money supply), an increase of over 6 percent from last year according to Federal Reserve data.  If people get fed up with not receiving any return on their money then this could further boost stocks.

 

So how do these observations affect my crystal ball?

  1. The stronger headwinds and tailwinds will increase volatility.
  2. Mid and small cap stocks will outperform large cap stocks
  3. Consumer stocks will do well
  4. Health and Tech stocks will continue to be solid
  5. The housing sector will continue to improve
  6. Energy stocks will underperform but at some point rebound from depressed prices (most stocks are a buy if they drop low enough)

 

The above predictions represent the opinion of John Quimjian, registered investment advisor representative. Written January 31, 2015.