It finally happened—after more than two years, QE3 is over, and the United States’ economy has flip-flopped from what it was when the third round of quantitative easing began. Gross domestic product (GDP) recently exceeded expectations, manufacturing is up, and the dollar is the strongest it has been in seven years.
Phil Flynn, senior market analyst at the Price Futures Group, calls the current situation “the inverse of the beginning of the economic crisis.” In 2007, when Ben Bernanke began a series of extraordinary interventions, the international sentiment was that the world would not be greatly affected by a U.S. recession. Other countries began raising interest rates, causing one of the biggest commodities spikes in history.
That came crashing down in 2008 once people began to realize that the problem was very real and the rest of world was more connected than they thought. Commodities plunged.
“Now we’re on the other [side] of the coin,” Flynn says. “Now, it’s the United States that is growing. The rest of the world is what’s having problems.” As the United States ends its assets-buying programs, Japan and Eurozone countries are increasing stimulus (see “Central bank divergence,” right).
In light of this, we asked analysts what market sectors they believe will be most active as 2015 approaches and all of these different monetary policies come into effect. While interest rates across the entire yield curve should be more volatile, even the pace of tightening is unclear, to which our analysts’ varying predictions for when the Federal Reserve will finally begin tightening its policy can attest.
Energies make a comeback
Crude oil has taken a pounding recently—U.S. production is skyrocketing, but a strong dollar is offsetting lower prices for producers. Saudi Arabia chose to compete on price rather than cut production.
But James Cordier, head portfolio manager at OptionSellers.com, is optimistic about this market. “We really like crude oil going into 2015,” he says, predicting that it will return to the $80 level and not go much lower than that.
Many analysts are thinking along the same lines. Jason Rotman, managing partner of Lido Isle Advisors, says, “I would not be surprised to see crude oil find balance between $80 and $90 in 2015.”
A couple of months ago that prediction would have put Rotman solidly in the bear camp, but things have changed. The number of drilling rigs in the United States is falling, and demand is sluggish at best. Yet lower prices may encourage consumption and provide gains later. According to Rotman, anything under $100 will be beneficial to the stock market: The lower the price of oil, the more money people have to spend and invest.
Flynn is looking forward to a new era for gasoline prices. “We’re going to get used to seeing gasoline prices below $3 per gallon,” he says. “That’s going to give a big boost to the stock market going into the new year.” He believes that oil will bounce off of a level no lower than $70 and hopes that this price will give a boost to both producers and consumers (see “A new game for crude,” below).
Matt Weller, senior technical analyst at FOREX.com, thinks these low prices will stay for quite some time. “Crude’s recent drop has been driven by increasing global supply, and this trend could continue into 2015,” he says. “While geopolitical risk is always unpredictable, the new regime of relatively low oil prices should hold through this year.”
Instead of further drops in price, the crude oil market will see a period of low volatility as traders consider both the global supply glut and production decisions by OPEC, according to Weller.
In other energies, Flynn is paying special attention to natural gas, which he believes to be an underrated market. “We’re going into the new year with prices lower than they were a year ago,” he says. Natural gas was one of the markets that actually outperformed in 2014, thanks to cold weather predictions and coal plant retirements. “It will catch people by surprise,” Flynn says.
A change in the metals game
Expect a new environment for metals in 2015. Weller says gold will lose its relevance as a “safe haven” as the economy picks up and people no longer express fear of a further economic downturn or a spike in inflation through gold. Weller notes that gold looks “particularly vulnerable” in 2015.
Currently, silver futures are dropping quickly as investors leave precious metals behind. Yet silver bullion coins are selling out at the U.S. Mint because of retail buyers rushing to take advantage of the lower prices. Dealers are having a hard time finding enough silver to satisfy their customers’ demands.
Cordier explains the shift away from gold: “With markets doing as well as they are, ‘safe haven’ probably won’t be as much of a buzz phrase next year.” He named silver as a hot market for 2015 and expects a rally. “We could see silver getting back to $20, and possibly north of that.”
Jason Rotman also expects silver to rise. “Not only will a ‘patient’ Fed potentially boost silver prices, but also as the global economy recovers and the United States continues its forward momentum, we might see increased demand for silver in industrial uses,” he says. He cautiously predicts that silver will approach the $20 level.
Flynn, however, is more reserved, considering the economic situation in the Eurozone and in Japan: “We’re going to see that it’ll be very difficult for gold and silver to rally without any help from growth in Europe and Asia.”
2015 is equities’ year
The Fed’s promise to keep interest rates low will create a supportive environment for stocks in 2015, and record highs are expected by most analysts.
Rotman expects the Standard & Poor’s 500 Index to reach 2100 next year, and that U.S. equities in general will rise to new peaks with a solid footing above the 2000 level.
Similarly, Cordier sees a bullish environment for equities, thanks to a growing economy and low interest rates. “Before we have any inflation—not anytime soon—we’ll have the majority of the global economy doing something well,” he says. “That will certainly propel stocks much higher.”
Alan Bush, senior research analyst at ADM Investor Services, says that the effect of low interest rates will actually outweigh the negative influence of geopolitical issues such as ISIS and Ebola. This interest rate effect will dominate stock indexes.
“It is becoming very clear that a new wave of global central bank accommodation is already here and more is on the way,” Bush adds. “The bullish influence of the globally low interest rate environment is likely to become even more bullish for stock index futures.”
Many central banks are leaning toward dovish policies; the Bank of Japan’s massive stimulus is only the most recent example. Even hawkish banks such as the Fed and the Bank of England are feeling the pressure to be less so. Adding everything together, we get a situation in which equities have nowhere to go but up. “Expect the bull market for stock index futures to continue for the rest of this year and well into 2015,” Bush predicts.
Weller gives some cautionary advice, however. “The halcyon days of dependable, low-volatility gains in equities have likely come to an end,” he warns, saying that equities will see increasing volatility and inconsistency in 2015. “While further gains in broad equity indices are possible, traders should consider adopting a more tactical, short-term outlook toward stocks this year.”
While Weller does acknowledge that stocks will be higher heading into the new year, playing off of the recent mid-term elections, the end of 2015 will not be so easy. The Fed is expected to begin tightening its policy soon, and that will limit gains in the equities market as the environment becomes less accommodative.
This leads to the big question: When exactly will the Fed begin raising interest rates? Bush gave the most dovish prediction. “I believe that inflation will not increase as the Fed is hoping for, and there will be more calls for stimulus.” Thus, the Fed will not be in a position to raise interest rates until at least 2016.
Matt Weller’s prediction was the earliest. “I anticipate that the Fed will begin raising rates earlier than many traders currently expect,” he says. Employment has already been taken care of: The labor market is getting back on its feet. Inflation is the next target. “As long as inflation continues to gradually edge higher, the Fed could look to start raising rates in the first half of the year, potentially as soon as its March meeting,” he states.
But most of the predictions hovered around Q3 or Q4 2015. Phil Flynn puts his trust in the Federal Funds futures, which predicts a September 2015 tightening (see “The market speaks,” below). Cordier leans toward a later date, because higher interest rates amidst the stimulus programs in China, Japan and Europe could send dollar strength skyrocketing—something the Fed wants to avoid if it wants the United States to remain competitive globally.
“The Fed really wants to be sure that the world can handle higher U.S. borrowing costs,” Rotman says. “We will see an extremely patient Fed.” His expectation was for Q4 rate increase at the very earliest.
Erik Tatje, senior market strategist at RJO Futures, says that it is possible rates will not be raised at all in 2015, despite moderate economic growth. Such an environment is extremely supportive of his market of choice: The U.S. Dollar Index.
Forex market volatility
“With the Bank of Japan recently announcing an increase to their QE policy and further stimulus measures on the part of the European Central Bank (ECB), I believe that the U.S. dollar may continue to rise as we head into 2015,” Tatje says. As other countries change their monetary policies to boost their economies, the dollar is in “prime position” to strengthen.
Such a divergence in monetary policies also could spell out greater volatility in forex markets. “The primary catalyst for increasing volatility will be the growing monetary policy divide between more hawkish central banks—including the Fed, Bank of England and the Reserve Bank of New Zealand—and the more dovish central banks, such as the ECB and Bank of Japan,” Weller says.
Some may hesitate to call the Fed hawkish, but many other central banks around the world are putting out policies that are extremely dovish in comparison. ECB President Mario Draghi recently expanded the bank’s stimulus program, sending the euro into a two-year low.
Given all of this, Rotman says, “Overall, the U.S. dollar is in a bull trend and will continue to trade higher into 2015.”
“Now the onus will be on the United States to continue to grow,” Flynn states. All eyes will undoubtedly be on the United States in 2015 as our economy continues to strengthen. Will low interest rates continue to boost stocks, even in the face of geopolitical issues? Will lower oil prices be able to support producers as well as users?
“It will happen, but there will be some scary moments in the next few months,” Flynn says.
No one knows for sure what is in store for markets in 2015 because it has been a long time since real fundamentals were allowed to run their course. Central bank policy has been the main driver in recent years but that is likely to change. Interest rates have to rise at some point and while equities have momentum going into 2015, the training wheels of QE3 have been removed and soon the zero-interest-rate environment will end as well.
This means that in equities, as with most market sectors, there likely will be greater volatility.
Editorial assistant Lauren Schmidt contributed to this article.
Skylar Zhang is a journalism student at Northwestern University in Evanston, Ill., and currently is interning at Futures.