Home' Trinidad and Tobago Guardian : December 28th 2014 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 28 • 2014
Can the US hold everyone else
above water? That is the ques-
tion investors are asking as
Wall Street heads into 2015.
A strong US economy helped propel the
stock market higher in 2014, continuing a bull
market that is on pace to celebrate its sixth
birthday in March. On more than one occasion,
investors dumped stocks following geopolitical
flare-ups and concerns about the global econ-
omy, only to jump back in when an economic
report or results from a big company suggested
the US economy was still resilient.
This bull market may be slowing down, but
it still has had a remarkable run. The Standard
& Poor s 500 index has more than tripled from
its March 2009 low.
Wall Street strategists, who typically are
bullish on the US stock market, expect the
advance to continue into 2015.
Here are the major themes investors will
need to watch:
Solid, not spectacular, again:
2014 has been a solid year for stocks, and
Wall Street forecasters expect more of the
same next year. The S&P 500 index is on track
to return 14 per cent in 2014 including div-
idends, a healthy gain but well below the 2013
return of 32 per cent. Because the US economy
should continue to improve, stocks are likely
to march higher in 2015, strategists say.
On average, strategists see the S&P 500 up
roughly 6.0 to 8.0 per cent, with most of the
gains coming from large multinational com-
panies that would benefit greatly from an
improving US economy.
Although there are risks that US-based
companies might see international sales slow
because of weakness in Europe and Asia, strate-
gists believe US growth will make up for that
While US-based companies do roughly half
their sales outside the country, profits are still
largely driven by the American economy.
The US economy is expected to grow 3.1
per cent in 2015, accelerating from the 2.2 per
cent growth it is expected to have this year.
This is a mature bull market, strategists say,
so stock prices are relatively high and the pos-
sibility for volatility even higher. Investors are
paying roughly US$17.50 for every dollar of
earnings companies in the S&P 500 generate,
the most they ve paid for stocks since 2010.
These high valuations could make investors
more nervous about holding stocks if prices
continue to climb. The stock market fell nearly
10 per cent in October, its first major sell-off
"Expect more pullbacks or corrections," says
Liz Ann Sonders, chief market strategist for
Slow rate hikes
For several years, the Federal Reserve had
been buying bonds to both keep interest rates
low and boost stock prices. The program,
known as quantitative easing, was designed
to make bonds seem more expensive than
That programme ended in October, but it
doesn t mean the nation s central bank hasn t
stopped helping out investors. The Fed has
kept its key interest rate near zero. Strategists
believe the time has come for the Fed to start
raising interest rates because the US economy
has improved enough to withstand higher bor-
rowing costs. This phenomenon is going to
have a huge impact on where the stock market
goes in 2015.
"I see the Fed starting to raise interest rates
in June, and it s going to be a gradual increase,"
said Russ Koesterich, global chief market strate-
gist at Blackrock. "Investors are ready."
Generally, strategists see interest rates going
from zero to 1 per cent next year, in gradual
increments of 0.25 per centage point each.
The Fed cut its benchmark short-term inter-
est rate to near zero at the height of the finan-
cial crisis in December 2008 to stimulate bor-
rowing and lending and to help prevent the
economy from collapsing. Stock investors have
enjoyed those record-low rates ever since.
Now that the US economy has recovered, a
near-zero interest rate makes little sense,
As interest rates rise, investments such as
bonds will pay higher yields. If bonds are earn-
ing more, stocks will have to work even harder
to be more attractive. That could set up the
stock market for some resistance.
Much ado about oil:
The collapse of oil prices this year has
become a huge topic of worry as well as a
comfort for investors.
American consumers love that falling oil
prices have driven the price of gasoline below
US$2.50 a gallon. Wall Street s relationship
with oil is far more complex, however.
Oil revenues are critical for several large
economies, including Russia. Banks loaned
money and energy companies issued high-
yield bonds to investors based on projected
oil revenues. Energy companies are reliant on
high crude prices to make money and to keep
their stock prices high.
Shares of energy companies in the S&P 500
are down 10 per cent this year. Many junk
bonds are trading at distressed levels.
There s worry that oil s drop could shake
up the global financial system. Russia s cur-
rency, the ruble, has slumped in recent months
because investors are concerned that the gov-
ernment could default or that the country
could slip into a recession. In 1998, Russia
defaulted on its debt, in part because of plung-
ing oil prices.
The big question for next year is whether
the world is simply producing too much oil,
or whether the global economy is not strong
enough to consume it fast enough. Also, if
prices keep falling, will oil producers start cut-
ting back production, which in turn could
provide some support for oil prices.
"I still believe what s happening to oil is
related to there being too much supply, but
the sell-off is sending ripples through the
market about global economic growth," said
Sonders of Charles Schwab.
Europe s economy was in recovery mode
the first half of 2014 before being derailed
by the Russia-Ukraine crisis. The economic
sanctions the European Union put on Russia
for its invasion of Crimea impacted Germany s
economy, Europe s largest, far more than
originally anticipated. Since then, Europe has
teetered on the brink of recession.
The Euro Stoxx 50 index, the European
equivalent of the Dow Jones industrial average,
is up only 1.0 per cent in 2014 versus the 12
per cent increase in the S&P 500.
The European Central Bank has stepped
in to help stimulate the region s economy
and is expected to ramp up its efforts early
next year. If the moves work, Europe will
come off investors worry lists. Until then,
If you re willing to take a more risky view,
some strategists say buying into Europe before
it recovers could provide an excellent return.
"There are low expectations for Europe s
recovery, which means prices are low," Koes-
terich said. In Europe, investors are paying
roughly US$14 for every dollar of European
company earnings compared with the
US$17.50 investors are paying for every dollar
of US earnings.
China and Japan are also concerns. The
Chinese government is still in a multi-year
effort to slow down the country s rapidly
growing economy, which has had mixed
results. Japan, meanwhile, is trying to stim-
ulate its stagnant economy through massive
amounts of economic stimulus.
While the stimulus helped briefly, the
Japanese government had to raise taxes to
cover the cost of the programme, effectively
negating what the officials were trying to do.
Bonds will have a tough year
... or won't:
The biggest prediction of 2014 to fall flat
on its face was that bonds would have a bad
year in 2014. They didn t; in fact, they went
in the opposite direction.
Instead of the 10-year US Treasury note
going from 2.97 per cent at the beginning of
the year up to 3.5 per cent, as many predicted,
the benchmark note was yielding 2.18 per cent
as of December 22.
Many strategists readily admit they com-
pletely missed on their bond predictions. Nev-
ertheless, many investors are doubling down
on their bond yield forecasts for 2015, with
some looking for the 10-year yield to reach
2.5 per cent to 2.75 per cent next year. They
reason that the US economy is improving and
the Federal Reserve is expected to raise interest
in 2015, but also
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