About this time every year, I’m asked two questions: 1) Did 2014 shape up as you expected?; 2) And what can we expect in the New Year? Given that we are in the final weeks of the year, now is as good of a time as any to address these questions.
Last year, I predicted that 2014 would be characterized by the Federal Reserve curtailing its quantitative easing, the continuation of a weak U.S. dollar, a steepening yield curve, an improving U.S. economy and a “flight to quality” in the stock market.
Well, I’ll be the first to admit that I was wrong about the U.S. dollar and the yield curve. When Spain’s 10-year bond yield fell below the 10-year Treasury bond yield in July and Germany’s 10-year bond “cracked” 1% in August, the stage was set for the “euro glut” to pour into the U.S. and flatten our Treasury yield curve as Europeans scrambled to profit from a resurging U.S. dollar.
The real catalyst for these euros pouring into the U.S. was excessive pumping by the European Central Bank and negative interest rates on member banks’ excess reserves.
Now, let’s consider my predictions for 2015.
1) The Fed Will Not Raise Rates
While folks at CNBC have been gossiping that the Fed will raise key interest rates sooner rather than later, nothing could be further from the truth. I look for the Fed to maintain its 0% interest rate policy for all of 2015. If the Fed were to raise key interest rates, it would artificially strengthen the U.S. dollar even more and raise the risk of deflation — and the Fed doesn’t want that to happen.
In addition, the two “hawks” on the Federal Open Market Committee (FOMC) are retiring in 2015. That will reduce the pressure to raise key interest rates further, since the “doves” will have minimal opposition.
And finally, since Fed Chairman Janet Yellen is a labor economist, she will continue to cite a lack of wage growth, too many temporary jobs and low labor force participation as reasons for the Fed to maintain its zero interest rate policy.
2) The U.S. Dollar Will Remain Strong
Second, I expect the U.S. dollar to remain strong, given that our interest rates are still higher than in the eurozone and Japan. The strong U.S. dollar will continue to “pinch” the profits of many big multi-international companies, like The Coca-Cola Co (KO), IBM (IBM) and McDonald’s Corporation (MCD), since they are being paid in eroding currencies.
Typically, when some of the former flagship stocks falter, new leadership emerges. And next year, I expect that new leadership to include small- to mid-cap stocks. The mid-cap stocks are leading the stock market right now, and more small-cap stocks should exhibit relative strength, too.
Overall, due to this leadership shift, I expect that small- to mid-cap stocks will significantly beat the S&P 500 in 2015.
3) U.S. Economy, Consumer Sentiment Will Improve
Third, as I mentioned earlier, U.S. economic growth should remain at least at a 3% annual pace. With falling gasoline prices, consumers have more money to spend, which, in turn, should ensure steady economic growth.
A slow, but steadily improving job market should also boost consumer sentiment. Typically, consumer sentiment also rises in the third and fourth year of a Presidential term, as the new candidates run around and “suck up” to the voters by telling them what they want to hear.
Bottom Line
In conclusion, I expect stocks to benefit from low interest rates, a strong U.S. dollar and an improving U.S. economy.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
