BY STEPHEN KYNE
The year 2014 had its share of distractions, at
home and abroad. The Ukraine, ISIS, Ebola, riots,
mid-term elections, lost airliners, the end of “stimulus”,
and immigration, to name just a few, all had a
short-term effect on the markets. In spite of all of
them, however, U.S. markets still managed a banner
year. This is confirmation, once again, that the U.S.
economic recovery is real.
With negative GDP figures in the first quarter,
the year had a bumpy start. The decline was largely
attributed to the severe winter weather experienced
by much of the nation. With recent revisions to third
quarter GDP showing 5 percent annualized growth,
we expect 2014 US economic growth to come in just
shy of 3 percent when all is said and done. Looking
toward 2015, we expect the economic expansion to
continue, and for GDP to continue growing at about
three percent.
We expected inflation to remain historically low,
and the 2014 Consumer Price Index (CPI) to come
in around 2 percent. However, due to lowering
energy costs, attributed largely to increased U.S.
production, we now expect CPI to register around 1.3
percent for the year. We expect to see energy prices
rebound modestly through 2015, which should be
reflected in an inflation rate of around two percent
in the year to come.
Once again, gold, often considered a hedge
against inflation, should not see much price appreciation
in the year to come, and may actually
continue decreasing in value.
After experiencing an increase of 30 percent
in 2013, the S&P continues to break records. We
projected an increase of 15 percent for the S&P in
2014, and the year-to-date increase as of Dec. 29 was
over 13 percent.
There are many perennially wrong naysayers
pointing to this increase as proof of a stock market
bubble, however with valuations still in the range of
15-17 times earnings, we feel that U.S. stocks continue
to be fairly valued. As companies continue to
report record earnings, we see more room for price
appreciation. While we expect the rate of U.S. stock
appreciation to slow, we think a ten percent increase
in the S&P is quite likely in the coming year.
The end to the Fed’s bond buying, known as
“stimulus,” turned out to be a non-event. There are a
great many economic pessimists who had advanced
the notion that the economy had been propped up
by the activities of the Fed, and were proved wrong
as the U.S. economy continues to post record figures
even after the end of stimulus.
We expect that in mid-2015, the Fed will begin
to raise interest rates. With rates effectively at zero
since 2008, and stimulus at an end, it’s only a matter
of time. While the initial reaction to this increase
may weigh on U.S. stock markets, it may be wise to
treat any dip as a buying opportunity, as we do not expect monetary policy to become tight in 2015, just
simply less loose.
Internationally, we see a varied landscape.
European growth is being hampered by systemic
problems. Some countries in the Eurozone should
see improvement in the coming year, including
Germany and Spain, while others, including Italy,
will be drag on the overall economic expansion. We
see growth in the Eurozone in the 1 percent range
in 2015. The decrease in the value of the Euro, relative
to the U.S. dollar and British pound, should help
Eurozone exporters by making their products less
expensive on the global markets.
Decreasing global energy prices should help
the more developed, of the developing nations in
Asia, including South Korea, India and China. We
see China’s growth rate slowing as it tackles issues
related to debt accumulation. India should show
an increase in its rate of growth as policy reforms
stemming from recent elections begin to take hold.
Many of the Latin American countries continue
to wrestle with their economic problems, including
Argentina and Venezuela. Mexico, in spite of its
own issues, should be able to take advantage of the
continued U.S. recovery and may continue to show
improvement.
Domestically, we see the economy continuing
to improve, unemployment decreasing, inflation to
remain in-check, and U.S. stock investors benefiting.
Overall, we think 2015 will be another great year for
the US economy.
Of course, these are forward-looking statements,
and are based on information currently available.
Any new information could dramatically alter our
projections, so be sure to consult with your financial
advisor to ensure your investment strategy reflects
your goals and any changes in the economic landscape.