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Monthly Archives: December 2014

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