Economic projections and investment insight for 2015

Wade Balliet
Posted by Wade Balliet
Investment Strategy

Our 2015 forecast echoes many of the themes from 2014 — an economic recovery driven by growth in consumer spending and lower unemployment.

Older couple sitting on large rock on a beach, looking out toward the water and bright horizon.Consumer spending growth of 2.7%. We expect U.S. consumers to spend at a pace closer to their historical norms during prior expansions; and we forecast real consumer spending growth of 2.7% in 2015, up from the 2014 average of 2.3%. Over the course of 2014, gasoline prices have fallen over 30% this year, but we see West Texas Intermediate (WTI) oil prices remaining around $70 to $80 a barrel in 2015.

5.4% unemployment by Q4. The U.S. unemployment rate should average 5.4% by the fourth quarter of 2015, a level of unemployment that most economists consider at or below levels seen in a “fully employed” U.S. economy.

Interest rate increases. In 2014, one big surprise was the fall in interest rates, which delivered a year of positive return for fixed income investors. For 2015, we predict that the downside risk for rates going lower is minimal. Rather, there is a larger probability of rates trickling higher as some global growth upside makes its way into the marketplace. The Fed is expected to begin fiscal tightening by increasing the Fed funds rate between the second and third quarter of next year, projected to move up to 1% by the end of 2015.

10-year Treasury yield to 2.9%. Our expectation is the 10-year Treasury yield will expand to between 2.8 and 2.9% from the estimated 2.4% rate at 2014 year-end.

U.S. stock market — the most reliable source of growth. Multinational U.S. companies often manufacture abroad; this will add to profit margins domestically as well as minimize the effect of the rising dollar on profits. The rising dollar also means that inflation should remain low and money flowing in from other countries should aid with consumer spending and capital investment by keeping interest rates low. The question is: Just how far can the U.S. carry the ball, given the global economy and the current above-average valuations?

Globally, equity markets contain potential hits and misses. In 2015,European equities may get a bounce; but with their continued economic struggles, when and how large of a bounce are the true questions. The emerging markets, as a whole, look to be mixed, with China to be the top contender to produce unexpected growth outside of the U.S. in 2015. Smaller emerging market nations may be promising, but any extreme overweight to any of these economies implies significant risk.

Key investment insights for the coming year:
  • The Investment Advisory & Management (IA&M) group is predicting less-than-historical average returns for both stocks and bonds in 2015; with increasing standard deviations, a look toward alternative asset classes is warranted. Don’t be lulled into concentrating exposures to overcrowded trades and away from diversified strategies.
  • Domestic markets look like the better bet in the short-term, but don’t be surprised if they pass the baton internationally in the latter half of the year.
  • When seeking international diversification, an underweight to Europe and Japan will likely be the better strategy for the first half of 2015, as stock returns are unlikely to compensate for the economic and currency weaknesses. We remain cautiously optimistic at this time due to expected volatility, with the hope that the economies in Europe and the emerging markets will strengthen during the year and add to the domestic momentum at some point in 2015.
  • REITs have performed well over the past few years, and we expect the trend to continue; however, domestic real estate has been the better performer by a good margin. We expect, as rates are raised by the Fed and the European recovery gains a stronger foothold, foreign real estate may be a better opportunity looking into 2015.

The year ahead will, as always, provide surprises both to the upside and to the downside. We encourage all investors to keep diversified, keep tactical, and keep a wary eye of trading on transient headlines versus qualitative fundamentals.

All investments involve risk.

Stocks of small and medium sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger more established companies. International investing involves special risks such as currency fluctuation, lower liquidity, political and economic uncertainties, and differences in accounting standards. Risks for smaller companies include business risks, significant stock price fluctuation and illiquidity. Investing in higher-yielding, lower-rated bonds has a greater risk of price fluctuation and loss of principal income than U.S. government securities, such as U.S. Treasury bonds and bills. Treasuries and government securities are guaranteed by the government for repayment of principal and interest if held to maturity. Investments in REITs are subject to the inherent risks of direct investment in real estate such as price fluctuation, liquidity, and concentration risks.

The views presented are those of the Investment Management and Trust Division of the Bank of the West Wealth Management Group and should not be construed as investment advice or an expression of the Bank’s view as to whether a particular security or financial strategy is appropriate for you and meets your financial objectives. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Investors should seek the advice of a financial professional regarding the appropriateness of any securities or strategies discussed. Past performance is no guarantee of future results.

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