This year has been a wild ride, with certain asset classes starting off well and then fizzling.
At the same time, the general large-cap equity sector has been a great trade to date in 2014.
Going forward we feel the following market themes will dominate for 2015 and drive our investment strategy:
- How long will the U.S. Federal Reserve feel comfortable taking “considerable time,” as it mentioned in a recent post-meeting communique, before nudging interest rates up?
- Oil prices: If we happen to hit $40 per barrel and, what will OPEC do in response? Will it be a blessing or a curse?
- Will the US dollar continue to strengthen and will commodities priced in dollars continue to falter?
- Will Europe recover and what about emerging markets?
Year in review
The US equity market has continued its rally thanks to the supply of freshly printed US dollars from the Federal Reserve.
Never fight the Fed is the number one rule in investing, but this rally has a flash flood feel and the rising tide is lifting all boats.
The Fed’s balance sheet expansion, U.S. debt levels and near-zero interest rates also have to be considered.
Just being long the US equity market worked well in 2014? Will it in 2015? Betting big on stocks is riskier than my people realize, in my opinion.
I expect that the Fed will not pay attention to large institutional investors clamoring about the massive drop in oil prices and the default risk to energy companies and their lenders.
In my opinion, the Fed will not raise interest rates until late in 2015 and don’t be surprised in oil falls below the $40 per barrel mark.
The dollar may strengthen further in my opinion. Given the weak economic environment outside the U.S., the yen, euro and Chinese renminbi don’t look attractive.
The Australian, New Zealand and Canadian currencies are under pressure from the decline in energy prices.
The Eurozone is pretty weak right now, but ECB President Mario Draghi is determined, in my view, to step in with targeted loans and asset purchases.
The economic picture of Europe is complex, given the disparity of economies in that region. However, I expect a nascent recovery to take hold.
Emerging markets are in trouble. The Russian invasion of Ukraine and the resulting US sanctions started the mess.
Brazil has been weakened by challenges at its state-owned oil company Petrobras. Chinese growth has slowed markedly.
That said, in my opinion, renewed growth in India and China will improve the emerging market outlook next year.
Any improvement in the Russia and Ukraine standoff will help as well.
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.