By Jeff Jones, Ph.D.
A new year is upon us, and that is always a good time to reflect on the prior year and assess what to expect in financial markets in the coming year. Relative to the last five to 10 years, 2014 was considerably less exciting, which to many was a welcome change. The U.S. stock market had a solid year, with the S&P 500 exhibiting a return of approximately 13.48 percent. Despite the expectation of rising interest rates and declining bond prices in 2014, rates actually declined on average in 2014 resulting in rising prices for bonds. In fact, 10-year T-bonds experienced a total return of 10.75 percent. Furthermore, in both the stock and bond markets, volatility was relatively tame. In commodity markets, the biggest news in 2014 was the extreme price decline of petroleum products near the end of the year, which was an unexpected (and appreciated) Christmas gift for consumers.
As 2015 begins, however, it appears we might be in for a more tumultuous year. Here are my thoughts on what to expect in various financial markets over the next year.
Stock market
The stock market has gotten off to a lousy start in 2015, and I expect considerable volatility in the stock market throughout the entire year. U.S. companies will have a difficult time maintaining the level of earnings growth that has occurred over the last few years. I expect that by the end of 2015, the stock market will be at levels very similar to those at the beginning of the year. In short, my prediction is for lots of ups and downs, but very little in the way of total returns for 2015.
Bond market
The bond market continues to perplex investors. For several years, economists have been calling for interest rates to rise as the Federal Reserve begins the process of ending and unwinding its Quantitative Easing (QE) programs. The general consensus has also been that the Fed will begin to raise the federal funds rate. These expectations, however, have simply not yet come to pass, with rates actually falling in 2014 and continuing to fall into 2015. Given increasing signals of a global slowdown, I don’t believe the Fed will take any action to raise interest rates in 2015. Bond prices, which have returned to near historical highs, will remain elevated throughout 2015.
Petroleum market
The fall in oil and gas prices that began near the end of 2014 has continued with force into the beginning of 2015. While all of us appreciate paying less at the pump, the precipitous decline in petroleum prices is not all good news. Certainly over the last decade, the U.S. has ramped up oil production and reduced its dependence on foreign oil. However, much of this expanded U.S. production has a higher marginal cost per barrel. If oil prices stay below $50 per barrel for an extended period of time, U.S. oil companies may find that it is no longer profitable to extract oil from certain areas, and shut down production of those facilities. This will result in lost jobs, and consequently, higher unemployment. In addition, the decline in oil prices may be a signal of a further slowdown in global growth. I expect that oil will fall at some point in 2015 to as low as $40 per barrel, and barring some political event (war, major terrorist attack, etc.), I don’t believe oil goes above $60 per barrel in 2015. In conclusion, 2015 will be a challenging year for the U.S. stock market, and tepid global growth will result in interest rates remaining at near record lows. But let’s all enjoy the low gas prices while we can!
This article appeared in the February 28, 2015 issue of the Springfield News-Leader. It is available online here.
Dr. Jeff Jones, CFA, CFP, CPA, CMA, CFM, is an assistant professor of finance at Missouri State University. The views expressed in this article reflect those of the author, have been distributed for educational and informational purposes only, and should not be construed as investment advice or a recommendation of any specific security, strategy, or investment product.