Predictions are inherently tricky business. With the many variables in play affecting the markets, from geopolitical events to finicky investors, trying to call the market is often an exercise in being wrong. Still, financial planners being, well, planners, it’s comforting to try to picture where we’ll be in 12 months and plan accordingly.
In addition to their monthly predictions, we asked our esteemed Asset Allocation panelists to provide their best estimates for where the markets will go in 2015. You’ll find our standard monthly Asset Allocation predictions, which look six months ahead, on page 16. Here, though, are predictions for all of 2015 from Mark Balasa of Balasa Dinverno & Foltz LLC; John Canally of LPL Financial; Gail Dudack of Dudack Research Group; Gary Shilling of A. Gary Shilling & Co.; and Sam Stovall of S&P Capital IQ.
One of our first questions was on the closing market values for different indexes as of Dec. 31, 2015. Our panelists put the Dow Industrials between 13,500 and 19,430, which, as of Dec. 8, 2014, stood at 17,855. Panelists’ predictions for the S&P 500, which closed at 2,060 on Dec. 8, ranged from 1,500 to 2,260. Predictions for closing values for the Nasdaq ranged between 3,500 and 5,300, compared to the Dec. 8 close of 4,740.
The 10-year Treasury was yielding 2.28% in early December. That could drop to 1% by next December, according to one panelist’s prediction, or rise to as high as 3.7%. Most panelists anticipate at least slight increases in the 10-year yield.
The panelists seemed to share fears of a drop in GDP next year, though. The Bureau of Economic Analysis released a revised estimate that put the annual growth rate at 3.9% in the third quarter of 2014, but none of our panelists predicted an annualized growth rate higher than 3.25% at the end of 2015. Most predicted the real GDP rate would fall to between 3% and 3.25%, while one suggested it could go as low as 2%.
All of our panelists agreed that continued slow growth and high debt in the eurozone would likely have the biggest effect on the markets in 2015. GDP for the region is still below its pre-crisis level by more than 2%, and the annualized growth rate for the third quarter was just 0.6%.
The European Central Bank recently cut its projections for growth through the end of 2014 from 0.9% to 0.8%, with sharper downgrades for 2015: from 1.6% to 1%.
Unrest in the Middle East and pro-democracy movements in China were also cited by our panelists as geopolitical issues that could affect the economy in 2015.
The specter of European economic woes extended to panelists’ fears here at home, too. When asked to rank their biggest worries for the U.S. economy next year, slowed growth and deflation in the eurozone were consistently listed in the top three.
The prospect of rising interest rates was another big concern. Two of our five panelists agreed that the Fed would begin raising interest rates in the second quarter, and predicted the federal funds rate at the end of 2015 would be between 1% and 1.25%. However, the majority felt rates wouldn’t begin to rise until at least the fourth quarter, if at all in 2015, and none predicted the federal funds rate would rise above 0.38%. In fact, one panelist expects the rate will be 0% at the end of next year.
Kathy Jones, fixed income strategist at Schwab, said in a panel in New York in early December that she expects short-term rates to go up next year.
“We expect the Fed to hike short-term rates” in 2015 producing a “flatter yield curve,” Jones said, since there are still powerful deflation forces at work “around the world,” tempering the Fed’s desire to raise longer-term rates. She also pointed out the “divergence in central bank” policies around the world, especially with the Bank of Japan and the European Central Bank continuing their easing policies compared to the Fed.
She also prompted laughter from the audience of journalists and advisors when she said “I used to hear people say they were worried about when rates will rise; now they can’t wait for them to rise!”
Hopefully, 2015 will be less divisive politically. Only one of our panelists cited political dysfunction in Congress as a serious concern, and another ranked executive orders from the president as a moderate concern.