After six years of a mostly uninterrupted bull market, some would say that U.S. stocks are currently priced to deliver lackluster returns in the times ahead. However, equities have been displaying solid fundamentals backed by a strongly rebounding economy, which may point to a good year for stocks in 2015.
Last year was marked by a sharp downward spiral in treasury yields, with the drop from 3% to 2.3% benefiting equity markets. Growth and momentum investors had a good year as economic buoyancy and volatility concocted a heady mix for the market. Even income investors had their share of the pie as many corporates rewarded investors with dividend hikes.
However, 2015 already feels a little different.
Key Issues That 2015 Might See
A slackening China, agitation in Russia and sluggishness in Japan remain among the key global headwinds for 2015. Also, analysts expect stimulus in Europe owing to deflationary concerns. An impending threat that Greece will defect from the Eurozone still looms large in the minds of investors.
The crude price plummet shows few signs of letting up as it breached the psychologically important $50 per barrel mark a few days back. Supply-demand disparity, political maneuvers of oil cartels and a strengthening dollar are the major culprits for the historic collapse in oil prices. Investors now fear a slowdown in global demand as another reason for dragging oil prices lower.
Back home, the backdrop looks a lot more upbeat. Recovery in the housing market, consistently improving labor market conditions and buoyant consumer sentiment continue to boost economic growth and brighten the outlook for the economy. Also, the crude freefall has actually turned to a boon for consumers by boosting their disposable income, in addition to lowering imported inflation and narrowing trade deficit for the country.
Additionally, the Federal Reserve's forward guidance indicates that it will soon put an end to its artificial constriction of interest rates. Historically, stock prices have reacted poorly to the first hike in a tightening cycle. Thus, the first rate hike, expected in mid-2015, might prove to be a crucial turning point for the equity market.
Volatility & the New “Normal”
Bull markets are inclined to become more volatile as they age, and this nearly-seven-year-old bull market is well past the average. Intense volatility is the inevitable by-product of manipulation of free markets, which the U.S. has seen in the form of the extraordinary QE program and interest rates control. Years of central bank manipulation has grossly distorted free-market pricing of assets, as speculators pursue assets that benefit from central bank policies.
