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.
We asked our panelists which products they thought would attract the most investor interest next year. Interestingly, despite the rapid increase in assets invested in liquid alternatives (liquid alts took in $34 billion over the last 12 months, according to Deutsche Bank, which anticipates another $49 billion in 2015), not a single one of our panelists suggested they would continue to attract that level of interest in 2015.
Look for ETFs to be the big winners among investors, our panelists suggested. Most agreed ETFs of any type would attract the most assets. According to the Investment Company Institute’s 2014 Fact Book, global ETF assets were $2.3 trillion as of the end of 2013, with nearly $1.7 trillion, or 72%, in U.S. funds. As of the end of October, the ICI estimated that U.S. ETF assets had reached $1.9 trillion, compared to $1.6 trillion at the end of October 2013.
One panelist said index products in general would attract the most investor interest, while another cited mutual funds.
With all this in mind, how should investors looking for growth be allocated next year? Most of our panelists recommended keeping bond holdings close to a quarter of the portfolio, although some favored a heavier cash allocation (10% versus 2%). Our perennially bearish holdout on the panel, Gary Shilling, recommended keeping 60% in bonds, though, splitting the remainder between stocks and cash.
Schwab Sees Bull Market Continuing
A panel of four Schwab strategists presented their 2015 outlooks for the markets and economy in the first week of December in New York, with the consensus holding that the long-running secular bull market will continue into the new year.
One of those panelists was Jeffrey Kleintop, a long-time member of Investment Advisor’s Asset Allocation panel while he was a strategist at LPL Financial, and who is now chief global investment strategist for Schwab. Looking ahead to 2015, Kleintop sees “better GDP globally” in 2015, helped by the fact that in much of the rest of the world, “austerity is dead.” He cited tax cuts in France and Italy and “broadly stimulative” monetary policy in Europe, Asia and Japan for his optimism, saying that foreign governments have “been in recession for the last five years” when it comes to spending, but “that’s ending.”
Already, he said, “assets are moving into emerging markets” since “we think pessimism has been priced in.” Moreover, Kleintop said emerging markets do well when “global trade perks up.” As for falling oil prices, Kleintop said emerging markets are no longer mainly about energy consumption and commodity exports.
In Europe, Kleintop sees the “potential for higher profits” from corporations, but serious profit growth will “require structural reform.” As an example, he cited the current parliamentary scuffle [in France] over raising the number of Sundays every year in which non-food retail outlets can be open. “Non-food retailers can only be open five Sundays a year; there are fireworks in Parliament over raising that to 12 Sundays a year!”
So what’s next for equities in the U.S. and abroad? Kleintop says one piece of economic data that he likes to watch is the U.S. current account deficit. When it is improving, U.S. stocks tend to perform better. When the current account deficit is declining, international stocks outperform. As of the beginning of December 2014, he said the deficit is flat, but if the Dec. 17 reading of the current account deficit declines, international stocks may be the better bet in 2015.
When it comes to advisors’ worries about the outlook for interest rates (see “Interest Rates, Expected Returns and Portfolio Construction Conundrums,” page 15), Kleintop concurred in the panelists’ assessment that the Federal Reserve is likely to raise interest rates next year, with fixed income strategist Jones saying she expects the Fed to start with short-term interest rates, perhaps as early as the late first quarter or the second quarter.
However, Jones said her team has been closely watching one part of the fixed income market—junk bonds in the energy sector. “We’ve been worried about risk-reward in junk bonds; [falling] oil [prices] has just exacerbated” that worry, noting that 15% of the Barclays High-Yield Index is represented by energy companies.
Bond traders are seeing “many offers” to sell, Jones said, but “no bids.” She warned that investing vehicles like mutual funds or ETFs that hold those energy junk bonds might face a liquidity issue, and that “we’ve yet to see the ramifications of companies trying to roll over their debt” in the energy sector when the underlying price of oil has fallen so far.