Market Commentary - 12.19.14 Turning Our Attention to 2015Six years after the 2008 financial crisis, the world is still struggling to return to normal. Extraordinary monetary stimulus is still needed to support growth in many developed countries and economic activity has yet to return to pre-crisis levels. It seemed at the beginning of this year that 2014 would be the year in which the global economy would move onto a higher, self-sustaining growth path. Fiscal policy in the United States and Europe had moved toward neutral after a period of austerity and monetary expansion, and hopes for an uptick in business investment were high. Then growth in Europe and the emerging markets disappointed, and an ill-advised tax hike stopped Japan’s recovery in its tracks. After mid-year the outlook for growth became even more clouded as oil prices fell by more than 40%. At first the market thought lower oil prices would act as a tax cut for consumers and boost aggregate demand. In recent weeks, however, markets have had second thoughts, with growing concern that plummeting oil prices may be a sign that the global economy is headed for a downturn once again. Will 2015 be the year in which growth finally responds to the massive monetary easing of the past few years, allowing central banks to step off the gas pedal? Or will it be yet another year of sluggish economic activity? The investment implications of the two outcomes are profoundly different.
Looking at 2015, we believe there are fifteen items that will be critical to shaping our views on the global economy and the markets in 2015.
| Outlook for global economic growth | Geopolitical concerns | | Inflation expectations | Market volatility | | Central bank actions | Financial market valuations | | The strengthening of the US dollar | Corporate earnings | | The direction of interest rates | M&A and corporate actions | | Credit availability | U.S. housing market outlook | | Credit quality | Direction of commodity prices | | Politics and potential Washington gridlock | |
Taking these fifteen items into account, we would summarize the outlook for 2015 as follows: growth in the United States, while still not as robust as in previous recoveries, will be strong enough to allow the Fed to raise interest rates. The decline in oil prices will be, on net, positive for global growth. Quantitative easing in Europe and Japan should allow those economies to avoid a downturn.
In this environment we continue to maintain an allocation to equities based on long-term investment objectives. We favor domestic equities, especially large cap stocks that should be in a better position to weather any shocks that may occur in the year ahead. With the prospect growing of higher interest rates in 2015, we recommend an essentially defensive position in fixed income, which means overweighting bonds that offer a yield spread over Treasuries (such as investment grade corporate bonds) and have positioned overall portfolio interest rate sensitivity to be below that of the benchmark. Finally, we believe it makes sense to retain an allocation to alternative investments due to their low correlation to traditional investments. Please see our 2015 Market Outlook for more details. This information is compiled by Cetera Investment Management.
About Cetera Investment Management
Cetera Investment Management LLC provides passive and actively managed portfolios across five traditional risk tolerance profiles to the clients of financial advisors, who are affiliated with its family of broker-dealers and registered investment advisers. Cetera Investment Management is part of Cetera Financial Group, Inc., which includes Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and Cetera Investment Services LLC.
About Cetera Financial Group
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No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision.
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