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10 Key Themes That Will Impact Your Investments in 2015

10 Key Themes That Will Impact Your Investments in 2015

If we look into our economic history books ten or twenty years from now, how might 2014 be remembered?  Maybe as, “the year that oil prices crashed, despite a strong US economy,” 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.

The Investment Committee at my company, Capital Investment Advisors, worked together to hone in on what we believe will be the 10 most impactful themes for investors over the next 12 months:

1. The US Economy – The US will slow from the torrid 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 5.5 percent. However, with Japan in recession and the European Union on the verge of recession, the US can’t completely “decouple” forever.  Look for a solid 2015, but not a runaway train.

2. 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 US recession.  Remember that a recession is negative growth for two full quarters. With the 5% surge we ended on 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) will be presented with 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).

3. Interest rates finally climb – This is something that we have been expecting for more than a year now.  With the Federal Reserve’s “taper” over, and Janet Yellen and co. already forecasting a rate rise in mid-2015, it is likely that we will see interest rates in more “normal” territory.  This means rising to the 3.5 percent range for 10 year Treasury bonds.

4. Less Smooth Sailing – Yes, we almost saw a full 10 percent correction during the fall of 2014, but we spent much of the year with relatively low volatility.  As the economy adjusts to higher interest rates in 2015, stock market volatility will likely pick up.

5. Ultra-Low Inflation – With the precipitous drop in US oil prices towards the end of 2014, lower energy input prices will 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 percent.

6. Sectors to watch – Lower oil prices and a solid US economy should bode well for the consumer discretionary, financial, healthcare, and technology sectors.  These sectors have historically performed well (relative to other sectors) in the year following a large decline in oil/energy prices.

7. Housing stays steady – The Millennial generation is expected to spend $1.6 trillion over the next five years on home purchases. This will continue to support housing prices as Millennials move out of their parent’s basements and start owning homes of their own.

8. Drama in the Middle East and Russia – Dramatically lower oil prices will continue to take a toll on oil reliant economies. Saudi Arabia will continue to produce oil regardless of how low prices go but can only fully fund its suite of rich social programs with oil at $87/barrel.  Likewise the Russian economy needs oil above $100/barrel for a balanced budget.  This means, most likely, both regions will see unrest as their citizens adjust to more economic strife and their government’s increasingly limited ability to “contribute” to keeping the peace.

9. European Recession – With aging demographics and restrictive labor laws continuing to plague many EU nations, a full blown recession overseas is not unlikely in the coming year.

10. Tech like it’s 1999 – Unlike the late 90s, 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 it’s still relatively small footprint seems hardly supportive of a now $2 billion valuation. This tells us that startup-chasing VC firms are beginning to create an environment reminiscent of the late 1990s.  Look for the tech “startup bubble” to continue to inflate in 2015.

 

Bottom Line 

As always, I’ll continue to keep an eye on the markets for you as we go into 2015, and update you here on any trends we see that spring up. I hope you have a wonderful and profitable 2015!

 

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

 

Read the original article here.


 

‘The US Economy Is Actually Doing Well’

If the last time you heard that “the economy is doing well” and thought to yourself “no way that’s true,” and “the source must be crazy”, then this blog is written for you.

I consistently discuss the state of our economy on WSB radio, and here in many of my blog posts. I’ve noted the economic bounce back we’ve experienced over the last several years and more recently noted how the economy is firing on multiple cylinders. I’ve also noted that we’ve been out of the recession since 2009 (also according the NBER who officially keeps tabs on economic cycles). While I continue to discuss extensive data to support the economic expansion we’ve been seeing, I’ve been amazed by the number of responses I’ve received from people who say that they don’t believe me (and not all of them say it so nicely). In my post several weeks ago I referenced a survey by the Public Religion Research Institute which said that 72% of US survey respondents still think we’re in recession.

I understand that when you see two of your neighbors out of work for months at a time, or your 25-year-old son can’t find a job, it’s easy to think that the economy hasn’t recovered. But, according to the Bureau of Labor Statistics US employment is actually at just 5.8% as of November. While it might not feel like the economy has recovered based on what you see around you, as investors, we have to look at the bigger picture when talking about the economy. We can’t zoom in on what we see happening in our own backyard.

One of my favorite Warren Buffett analogies has to do with the US economy and how it related to an “Economic Pie.” To breakdown his idea into simple terms, he believes that as the “pie” gets bigger, investors will, over time, participate in that growth. It’s important to know, though, that it doesn’t necessarily mean that every single ingredient in the pie, or even every slice, has to get bigger or grow at exactly the same time.

Now let’s look at how this translates into the real world today. At any given point in the economic cycle we will see unemployment numbers fluctuate, consumer confidence jump up and down, the housing market zigzag and manufacturing constantly move in fits and starts. While we rarely see every single economic indicator move up at the same time, it’s the sum of the pieces moving together in an upward (growing) direction that really matters. The pie as a whole is what we need to pay attention to – not just what you see anecdotally. And, as a whole here are a few important points to note the economic progress that we have made since the recession ended in 2009:

  • Unemployment – Peaked at 10.1% in 2009, today it stands at 5.8%
  • Housing – Housing starts bottomed in April of 2009 at close to 450,000. Today we are building close to 1.0 million new homes a year.
  • Manufacturing – The ISM manufacturing index has risen from below 35 (indicating severe contraction), to nearly 60 today (any number above 50 spells expansion)
  • The question is will we continue to see a moderate to strong economy over the next 6 to 12 months?

Economic forecasting is a difficult business; however, building on where the economy stands today and factoring in the impact of lower energy prices – the outlook is healthy:

  • Lower energy prices = increased consumer spending
  • Lower energy prices = continued low inflation
  • Low inflation allows the Federal Reserve be patient about raising borrowing rates
  • Continued low rates are a tailwind for the economy, jobs, housing and the stock market.

Bottom Line

Warren Buffett’s analogy about the “Economic Pie” getting bigger is exactly what has happened here in the US over the past 5.5 years. While the economy sometimes feels like it’s zigzagging and confusing, overall we’ve been seeing the pie grow. As this continues we will see continued prosperity in the US. That’s good news! Even if it’s sometimes hard to see.

Read the original article here.


 

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