Looking ahead to 2015, we (LPL) see a year that will be 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.
LPL Financial Research has identified significant elements that will be in transit in 2015, which include:
The U.S. economy continues its transition from the slow gross domestic product (GDP) growth of 2011-2013 to more sustained, broad-based growth. Ongoing progress in the labor market, an uptick in wage growth, and continued improvement in consumer and business spending have propelled an uptrend in U.S. economic output. LPL Research expects that inflation-which has historically accelerated as the economy moves into the second half of the business cycle-is poised to continue proceeding higher, but only modestly so.
Central banks around the world will also be on the move in 2015. In the United States, the economy is likely to continue to travel toward a point where the Federal Reserve (Fed) will begin raising interest rates, albeit gradually, for the first time in nine years. The Eurozone and Japan-the world's second and fourth largest economies, respectively-could benefit, as central banks in those regions embark on more aggressive policy actions aimed at restarting and reaccelerating their long-dormant economies.
Washington shifts from a relatively quiet 2014 to take a bigger role in 2015. The Republican takeover in the Senate and approaching debt ceiling limit might provide the opportunity for some movement out of the gridlock that has plagued Washington in recent years.
Against this backdrop, LPL Research forecasts the following:
The U.S. economy is expected to expand at a rate of 3% or slightly higher in 2015. This forecast matches the average growth rate over the past 50 years, and 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.
Tempered by increasing levels of volatility, stocks may be poised to advance 5-9%. LPL Research expects continued economic growth, benign global monetary policy, and a more favorable policy climate from Washingtonindicate that the powerful, nearly six-year-old bull market should continue. This forecast is in-line with the average stock market growth of 7-9%, since WWII. Supported by improved global economic growth and stable profit margins in 2015, expected earnings per share growth for S&P 500 companies is 5-10%.
Expect flat bond market returns. With sustained improvement in economic growth, slowly rising inflation, and the approach of the Fed's first interest rate hike, bond prices are likely to decline in 2015. LPL Research believes high-yield bonds and bank loans with their attractive yields can help investors manage this challenging bond market.
To help investors prepare for an expected market in transition, LPL Research has compiled timely advice into its Outlook 2015: In Transit publication.
Transition, as is described in this publication, is just another word for change. The forthcoming change in the economic and market landscape in 2015 offers great opportunities, but also major challenges, likely in the form of increased volatility. However, as LPL Research forecasts relatively strong economic growth unfolding over the horizon, the bigger threat to most investment portfolios will be the pull of our emotions. It is human nature to weigh market struggles substantially more than the strong market returns between them. As investors, keeping our emotions in check when confronting increased volatility could be the key to potential success in 2015. With an investment strategy in hand and a destination in mind, LPL Research believes 2015 is poised to be a potentially favorable, though perhaps volatile, year for investors.
Click on the image below for the 2-page 2015 Abridged Outlook publication:
Click on the image below for the Full 15-page 2015 Outlook publication: