What to expect in 2015-
The crazy and volatile swings that we endured in 2014 will be
a normal occurrence this year as well. With geopolitical unrest still looming over, frail economic conditions in Europe, madness in the Middle East, and sluggish emerging market growth, expect to see similar swings again. On a positive note, the S&P 500 did have a fabulous run in 2014 – rewarding patient investors with double digit returns – just shy of 12%.
Oil, Oil, Oil….
Let us expand on some facts – Crude oil prices reached all time lows
few months ago, but have now formed some resistance around $48/barrel. What started out as a political propaganda to crush Russia for invading their friendly neighbors and ISIS for the brutal onslaught on their own people, quickly morphed into a game of chicken between Saudi and U.S.
U.S. is now considered the number one oil producer in the world, and that doesn’t bode well for the Saudis. For that reason they are playing the price war to crush the U.S. shale industry and to deplete other OPEC supplies..
Some believe we have reached bottom, others are skeptical and feel we could be in the 30’s. This boom in US shale along with significant slow down in demand have created a great imbalance. Oil rigs are now starting to come offline to offset this influx of refined oil – but not nearly as enough. The immediate concern to consider is storing the access supplies.
Oil prices will continue to fluctuate, and global uncertainties will dictate the slope and direction of those fluctuations. If you are interested in investing in the oil/refinery industry, the it is wise to take positions in fundamentally sound companies that offer decent yield returns suck as Chevron, Exxon, British Petroleum, Total – not only do they pay healthy dividends, but they are somewhat immune to huge swings in crude prices, better leverage, and can weather the storm if things get dicey. Look in the refinery sector to do complement those positions. CVR Energy Inc., Western Refining Inc. to name a couple.
While everyone likes to speculate, I resort to common sense and known facts.
1- Production levels are unchanged (Saudi refuses to reduce throughput)
2- Global demands are low (thanks to alternative fuel/energy)
3- Supplies are reaching maximum capacity (we will soon have trouble finding storage)
If those factors are not resolved, expect turbulent times ahead.
This chaos may take some time to unfold – It is a cyclical industry and things will play out eventually. If you’re a long term investors, there’s no need to worry.
Let us switch our focus to other factors that will play a major role in the 2015 financial outlook.
Monetary Policies
The central bank of the United States is the ‘FED’. FED stands for Federal Reserve System
but this is also referred to as the Federal Reserve for short. Although the FED is an
independent government institution, the American central bank is owned by a number of
large banks and therefore not by the state.
Federal Funds Rate ( the interest rate at which banks and other depository institutions
lend money to each other, usually on an overnight basis) has been at 0.25 for 5 years – sine Dec 2008.
Analysts are anticipating a gradual tightening; a rise in interest rate is expected but no one is sure of the timing. The FEDs have been hinting but they remain dovish at taking action – acting too soon could destabilize this fragile economy.
Paul R. from CNN Money, wrote a lovely article that gives great insights on the effects of rate hikes (full article)
Investing Ideas: Favor the financial sector such as regional banks, consumer discretionary (retails, autos, etc.,), real estate, home building, construction, raw materials, etc,.. Certificate of Deposit (CD) is another form or investment that benefits from rising interest rates. Proceed with caution when investing into rate-sensitive sectors, such as Fixed income, REITs, Utilities.
Investopedia has a nice article regarding this topic – click HERE to read full article
Dollar Index
Let’s talk about the Elephant in the room that no one is addressing: the strength in the US dollar. Due to weak global conditions, troubled European economy, slow growth in the Chinese & Emerging markets. U.S. became a safe haven for investors from all corners of the world. The dollar has been gaining a lot of momentum against other currencies – Europe in particular. They are going through the similar turmoil we faced when our market collapsed in 2009. The European Central Bank (ECB) have been dragging their feet in terms of quantitative easing, but finally committed to €60 billion/mo, starting this month to stimulate their sluggish economy.
Investing ideas: It might sound aggressive but there are bargains in the European multinational sector (Nestle, Sanofi, Total, Telfonica, BNP Paribas, France Telecom, Siemens, Deutsche Telekom, Bayer, etc,.).
If you prefer to let the monetary easing play out first, that’s a wise move. Also consider investing opportunities in Japan.
Unemployment
Although the unemployment rate is steadily declining, most believe the economy haven’t created
enough jobs, and the data is not sufficient to start taking victory laps. “The latest jobs numbers released today by the U.S. Bureau of Labor Statistics indicate further steps are necessary to boost employment demand, which is still not close to the level that will generate healthy wage growth. Although the U.S. economy added 295,000 jobs in February, wages grew by only 2.0 percent over the past year according to the new BLS data.” writes Ben Zipperer. His well written article also talks about wage increase and strength in the labor market. Read full article HERE
Currently, we inched our way down to 5.5% – according to the Bureau of Labor Statistics. – a long way from 9-10% unemployment.
Conclusion
The 2015 financial outlook might be worrisome, but many indicators are pointing to a strong economy; those factors could determine if we are on stable footing or turmoils are ahead. Things to watch in the upcoming months are corporate earnings, crude oil stability, retailers, job reports, and FEDs monetary tone and sentiment on the economy
Remember, it all begins with understanding your goals and investment objectives. A diversified portfolio has been proven to be the best approach in a world of uncertainties. Financial planning is crucial and must be discussed with a professional financial advisor who seeks your best investment needs and interests.
Until next time, happy investing!!
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So, how does that affect your portfolio?? It all depends on your investment strategy; short, intermediate or long term. In today’s chaos, I highly suggest you remain long- if you have been hurt by this stock market volatility, don’t panic, stay the course. On the other hand, if you have profits take some off the table, and hold 30-40% in cash. Investing in well known, fundamentally sound companies is the best hedge against the house casino! If you are uncomfortable hand picking those stocks, I encourage you to look into ETFs. Unlike mutual funds, they provide better liquidity, lower fees, and more diversity.
