Investor Headwinds in 2015
Written by Rick Welch on February 17, 2015
As defined, a headwind “is a wind blowing directly against the course of a moving object” or the definition I like most for this example “is a source of resistance, as to progress or success.” In 2015, investors may see several significant sources of resistance both here at home and abroad. Let’s take a few moments and consider a few of these potential sources of resistance.
Volatility should play a bigger role in how our portfolios perform this year. Just six weeks into 2015 and we have seen the S&P 500 fall 3.1% in January and then come roaring back over 5.0% thus far in February. Monetary policy here at home and abroad will dominate investor attention, with diverging policies contributing to an increase in volatility. Here in the US, the Federal Reserve will begin raising interest rates (summer 2015?) which action may be countered by falling commodity prices and a continued strengthening of the US dollar. Any suggested delay to the Feds’ plans will only add to the growing investor uncertainty around monetary policy.
Diverging monetary policy abroad will become more of a central theme in 2015. After months of unfilled promises, the ECB on January 22nd announced plans for a quantitative easing program of its own. In the weeks following the announcement, we saw good gains in European stocks coupled with rising consumer and business confidence. Critics of the plan suggest that the ECBs’ actions alone are insufficient to solve Europe’s problems due mainly to the lack of much needed comprehensive structural reform……and what about Greece? An article in a recent Barron’s suggested this learning point for the next recession - If we have learned anything in this post-recession recovery it is that “currency devaluation is a zero-sum game in a world that isn’t growing and that the early movers are the biggest beneficiaries at the expense of the late movers.”
With the price of oil down over 50% in the past six months, many American businesses and consumers have benefited. Once oil prices stabilize (say at $60 this year and a target of $70 in 2016), the energy sector should recover nicely. In the meantime, this sector (which represents about 12% of the S&P 500) could create some drag on the broader economy. Liz Ann Sonders of Charles Schwab wrote this recently, “Some negative short-term dislocations are now becoming evident, with capital spending plans being slashed and layoffs announced – both in the energy sector as well as by companies that provide equipment and services to the oil industry. It should also be noted that there is the potential that the fall in oil prices is signaling something more serious in the global economy, with a nod toward the fact that many other growth-sensitive commodities are sinking as well.”
4th quarter earnings are in for about 80% of the S&P 500 and thus far we see that profits grew at solid pace of about 6.3% - take out Apple and that rate falls to under 2.0%! Of greater concern is that revenues have grown at a slower rate of just 1.4%. Where has all the growth gone? The main culprit is a strengthening dollar which is the result of relative economic strength and the prospect of tightening monetary here in the US. It is likely that valuation expansion for US equities has for the moment run its course, leaving investors ever more focused on earnings to allow this current bull market to continue.
