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NO DEFLATING THE U.S. DOLLAR

Unlike the footballs that the New England Patriots used in the AFC Championship game against the Indianapolis Colts, the U.S. dollar has remained well inflated. The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015. The latest leg up has been driven by anticipation and arrival of quantitative easing (QE) by the European Central Bank (ECB). Bold stimulus from the ECB, and other central banks around the world including the Bank of Japan, has put substantial downward pressure on the euro, the yen, and other currencies, while boosting the dollar. In general, more supply of a currency drives down its value. In this week’s commentary, we discuss some of the causes of the strong U.S. dollar and some of the most important implications for investors.  The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015….

NO DEFLATING THE U.S. DOLLAR

 

EUROPEAN HEAD FAKE?

The European Central Bank (ECB) is likely to announce a quantitative easing (QE) program involving European sovereign bond purchases at its upcoming policy meeting on January 22, 2015. Recall back in September of 2014, in our two-part Weekly Market Commentary “Don’t Fight the ECB?” we highlighted several reasons for favoring U.S. equities and largely avoiding European equities,despite the ECB’s prior stimulus efforts and potential for outright QE. With QE likely forthcoming, we revisit the opportunity in Europe, which we believe may be setting the stage for a head fake. WHAT WE ARE WATCHING As we evaluate the opportunity in European equities, here is what we are watching:. Economic growth, Inflation. Earnings, Valuations, Loan growth, Relative strength. Economic growth gap between the U.S. and Europe is widening. The U.S. economy has been growing faster than Europe in….

European Head Fake?

Want to be happy and successful?

To save you decades of life or hours of research paper reading, what is the best way to think about your life and time if you want to be happy and successful? Have a very positive and nostalgic view of your past, be balanced in your enjoyment of today and planning for tomorrow, and absolutely avoid a negative view of your past and a fatalistic view of the present. Some of this is common sense to successful people, bad attitudes and a lack of planning result in bad outcomes, but what about this past stuff? I have discovered that it’s not so much our past as our view of our own past that has a huge impact on the present and future. Family members with nearly identical life experiences can have very different views of their past and as a result, very different life satisfaction. Of course, there is no doubt that some aspect of our past-view is colored by our outcomes, so that people with unhappy lives connect the causal dots to unhappy past events. But I firmly believe that in order to be happy and broadly successful in all areas of our lives, we need to view our past as a series of events that lead to a positive and happy life. Said another way, as we write the unfolding story of our lives we have the power to choose the chapter titles, to select the turning points and the shaping factors that best explain happy and successful present and future, and in so doing, make our lives a story worth living. – Michael W. Boone, CFP, CFA

 

*Albright, Robert and John McDermott. 2015. “Time Perspective and the Practice of Financial Planning.” Journal of Financial Planning 28 (1): 46–52.

THE BRIGHT SIDE OF CHEAP OIL

Earnings season is here and, as we wrote in our earnings preview last week (“A Tale of Two Earnings Seasons”), low oil prices and the energy sector will be the market’s main focus. Energy companies begin to report earnings this week, as energy services provider Schlumberger releases results on Thursday, January 15, 2015, although most of the sector’s results will come the last weekof January and first week of February. While we try to gauge the energy sector outlook, we will also pay close attention to sectors and industries that potentially benefit the most from cheap oil, particularly in the consumer discretionary sector and the transportation industry, or the transports. The obvious place to start when analyzing beneficiaries of cheap oil is the consumer discretionary sector. The “tax cut” from lower prices at the pump is significant. U.S. consumers purchase about 140 billion gallons of gas annually, so a $1.00 drop in gasoline is a net savings of $140 billion (or about 1% of gross domestic product [GDP]). Each household that has been spending about $2,500 per year on gasoline (roughly the national average) will see a drop of perhaps $600 annually, based on U.S. Energy Information Administration (EIA) forecasts. For someone making the median income in the United States (about $52,000), that’s almost an extra week’s paycheck. And the total does not include home heating costs, where additional savings are captured, as the decline came just ahead of the coldest winter months (the sharp drop in natural gas prices is also helping). Depending on your assumptions, savings for the average American from lower energy prices could reasonably be estimated at over $1,000 per year, which for many, is like getting a raise. Keep in mind the consumer represents two-thirds of the U.S. economy. Depending on your assumptions, savings for the average American from lower energy prices could reasonably be estimated at over $1,000 per year….

The Bright Side of Cheap Oil

Back to the Future in 2015

The Hollywood blockbuster Back to the Future was released 30 years ago, in 1985, and is garnering some headlines lately as its sequel, Back to the Future II, was mainly set in 2015. The original film, set in 1985, sees the main characters use a time traveling DeLorean — that’s a car for those of you born after 1975 — to travel back to 1955, and at the end of the film, briefly, to this year, 2015. The quick visit to 2015 at the end of the first film set the stage for the sequel, Back to the Future II, which was released in 1989. Although some of what was depicted as 2015 in Back to the Future II—hoverboards, flying cars, sneakers with automatic shoelaces, fax machines everywhere, time travel, and the Cubs winning the World Series — has yet to happen (sorry Cubs fans), some things about life in 2015 did come true. Flat-panel TVs, hands-free gaming, cameras everywhere, video chatting, and yes, even drones, all appear as staples of everyday life in 2015.

Back to the Future II

doesn’t tell us much about the economy in 2015, however, although most of the economic activity in the film seems to revolve around selling 1980s nostalgia and casino gambling. But how might 2015’s economy compare with 1985’s, which is often thought of as part of the roaring 1980s and, in some respects, a golden age for the U.S. economy?

Back to the Future 2015

10 Stock Market Questions for 2015

Does the drop in oil prices mean a sharp slowdown in growth is coming? We don’t think so. Overall, we estimate that the $50-plus drop in the price of WTI Crude Oil since June 2014 may boost U.S. gross domestic product by

roughly 0.5%. The drop in oil has many beneficiaries, including consumers (who save about $1.4 billion for each 10 cent drop in gasoline prices), airlines, and manufacturers who benefit from access to cheaper fuel. Although some

overseas economies — Russia in particular — are hurt by lower oil prices, oil importers such as China and Japan benefit. Lower oil prices will slow the U.S. energy boom and capital investment in the sector but will not stop it.

Will the Federal Reserve (Fed) end the bull market? This is unlikely. Although the likely start of interest rate hikes in late 2015 may contribute to an increase in stock market volatility, history has shown that

stocks have subsequently performed well when the Fed started to hike rates in response to better growth. During the nine economic expansions over the past 50 years, the S&P 500 has performed well around the first Fed rate hike,

suggesting the Fed is unlikely to derail the market next year. The first rate hike has historically come only about halfway through economic cycles and well before bull markets have ended. (See our Outlook 2015: In Transit publication

for details.)

10 Stock Market Questions for 2015

Will Shoppers Bring Holiday Cheer?

We think the holiday shopping season may bring some holiday cheer for the

markets this year. The U.S. consumer is in good shape, the season got off

to a strong start, and the stock market has performed well. Even after last

week’s 3.6% loss, led down by the energy sector as oil’s slide continued,

the S&P 500 has returned 10.5% year to date. We expect holiday shoppers,

bolstered by lower energy prices, to help support potential stock

market gains. The U.S. consumer is in good shape. As we noted in our Outlook 2015:

In Transit publication, the consumer is a key factor supporting our 3%-plus

U.S. gross domestic product (GDP) forecast for 2015.* Job growth has

picked up in recent months, with an average of nearly 300,000 jobs added

per month over the three months ending in November 2014.

Will Shoppers Bring Holiday Cheer for Markets?

Beige Book: Window on Main Street

The latest Beige Book reflected a picture of the U.S. economy that has been largely unaffected by the increasing market concern over falling oil prices, the end of QE in the

United States, and the rising U.S. dollar. The report suggested that U.S. economic activity has “continued to expand,” and in general, optimism regarding the economic

outlook far outweighed pessimism, as it has for the past 18 months or so. For the first time in this business cycle, the latest Beige Book contained more than one mention of

employers having difficulty finding low-skilled workers, and retaining and compensating key workers. Over the past 3 Beige Books, the BBB has averaged +93, in-line with the

highest readings over any 3 consecutive Beige Books since at least 2005, suggesting recent market concerns have not been a threat to the U.S. economic expansion as of late November 2014….

Beige Book: Window on Main Street

 

U.S. Economic Growth Picks Up

Overseas, policies already in place — and those that we expect to be enacted over the course of 2015 — are likely to be big drivers of global growth. We expect the U.S. economy will expand at a rate of 3% or slightly

higher in 2015, which matches the average growth rate over the past 50 years. This forecast is based on contributions from consumer spending, business capital spending, and housing, which are poised to advance at

historically average or better growth rates in 2015. Net exports and the government sector should trail behind. As the economy continues to grow at a moderate pace in 2015, we expect this expansion to potentially take us

into 2016, where we could likely find tightening labor market conditions and a rising fed funds rate. The United States is in the middle stage of the economic expansion, presenting investment opportunities and risks for investors. While the

U.S. economy has grown over time, the growth has not been in a straight line. The variations in the pace of growth around the long-term trend are called economic cycles. Economic cycles have four distinct stages: recession,

early (recovery), middle (mature), and late (aging). By historical standards, the economic recovery that began in mid-2009 has been by far the most tepid recovery on record, with GDP through

third quarter 2014 just 11% above its 2009 trough. In all recoveries since the end of World War II (WWII), the economy expanded 24% on average in the first five years of recovery. The current recovery even lags the last

three (beginning in 1982, 1991, and 2001), which we believe are the most comparable. Five years into those recoveries, the economy stood 16%…

U.S. Economic Growth Picks Up

 

LPL 2015 Outlook

Since the wind-down of the Great Recession in early 2009, the latest economic expansion has certainly delivered the goods and rewarded investors’ mailboxes with six consecutive calendar years of positive gains for stocks. “Neither snownor rain nor heat nor gloom of night” has kept a lid on the continuation of one of history’s greatest bull market advances for stocks, and LPL Financial Research believes this trend of rising equity prices may continue in 2015.But unlike the last two years, when the global economy produced improved growth on the back of a stabilizing economic backdrop, 2015 will be a year marked by transitions. Likely changes in monetary policy around the world, the return of volatility, and the recent shift in the political balance of Congress could mean 2015 is a year that will have the global economy, markets, and central banks all on the move. To help prepare for rerouting to this more volatilroad ahead, our Outlook 2015: In Transit expedites the delivery of the investment insights needed to navigate an economic backdrop shifting to the latter stages of the business cycle…..

2015 LPL Outlook