Investors expect ups and downs in 2015

Associated Press

NEW YORK

Can the U.S. hold everyone else above water? That is the question investors are asking as Wall Street heads into 2015.

A strong U.S. economy helped propel the stock market higher in 2014, continuing a bull market that is on pace to celebrate its sixth birthday in March. On more than one occasion, investors dumped stocks after geopolitical flare-ups and concerns about the global economy, only to jump back in when an economic report or results from a big company suggested the U.S. economy was still resilient.

This bull market may be slowing down, but it still has had a remarkable run. The Standard & Poor’s 500 index has more than tripled from its March 2009 low.

Wall Street strategists, who typically are bullish on the U.S. stock market, expect the advance to continue into 2015.

Here are the major themes investors will need to watch:

Solid, not spectacular, again

This has been a solid year for stocks, and Wall Street forecasters expect more of the same in 2015. The S&P 500 index is on track to return 14 percent in 2014 including dividends, a healthy gain but well below the 2013 return of 32 percent. Because the U.S. economy should continue to improve, stocks are likely to march higher in 2015, strategists say. On average, strategists see the S&P 500 up roughly 6 to 8 percent, with most of the gains coming from large multinational companies that would benefit greatly from an improving U.S. economy. Although there are risks that U.S.-based companies might see international sales slow because of weakness in Europe and Asia, strategists believe U.S. growth will make up for that drag.

While U.S.-based companies do roughly half their sales outside the country, profits are still largely driven by the American economy.

The U.S. economy is expected to grow 3.1 percent in 2015, accelerating from the 2.2 percent growth it is expected to have this year.

This is a mature bull market, strategists say, so stock prices are relatively high and the possibility for volatility even higher. Investors are paying roughly $17.50 for every dollar of earnings companies in the S&P 500 generate, the most they’ve paid for stocks since 2010.

These high valuations could make investors more nervous about holding stocks if prices continue to climb. The stock market fell nearly 10 percent in October, its first major sell-off since 2011.

“Expect more pullbacks or corrections,” says Liz Ann Sonders, chief market strategist for Charles Schwab.

Slow rate hikes

For several years, the Federal Reserve had been buying bonds to both keep interest rates low and boost stock prices. The program, known as quantitative easing, was designed to make bonds seem more expensive than stocks.

That program ended in October, but it doesn’t mean the nation’s central bank hasn’t stopped helping out investors. The Fed has kept its key interest rate near zero. Strategists believe the time has come for the Fed to start raising interest rates because the U.S. economy has improved enough to withstand higher borrowing costs. This phenomenon is going to have a huge impact on where the stock market goes in 2015.

“I see the Fed starting to raise interest rates in June, and it’s going to be a gradual increase,” said Russ Koesterich, global chief market strategist at Blackrock. “Investors are ready.”

Generally, strategists see interest rates going from zero to 1 percent next year, in gradual increments of 0.25 percentage point each.

The Fed cut its benchmark short-term interest rate to near zero at the height of the financial crisis in December 2008 to stimulate borrowing and lending and to help prevent the economy from collapsing. Stock investors have enjoyed those record-low rates ever since. Now that the U.S. economy has recovered, a near-zero interest rate makes little sense, investors say.

As interest rates rise, investments such as bonds will pay higher yields. If bonds are earning more, stocks will have to work even harder to be more attractive. That could set up the stock market for some resistance.

Much ado about oil

The collapse of oil prices this year has become a huge topic of worry as well as a comfort for investors.

American consumers love that falling oil prices have driven the price of gasoline below $2.50 a gallon. Wall Street’s relationship with oil is far more complex, however. Oil revenues are critical for several large economies, including Russia. Banks loaned money and energy companies issued high-yield bonds to investors based on projected oil revenues. Energy companies are reliant on high crude prices to make money and to keep their stock prices high. Shares of energy companies in the S&P 500 are down 10 per-cent this year. Many junk bonds are trading at distressed levels.

There’s worry that oil’s drop could shake up the global financial system. Russia’s currency, the ruble, has slumped in recent months because investors are concerned that the government could default or that the country could slip into a recession. In 1998, Russia defaulted on its debt, in part because of plunging oil prices.

The big question for next year is whether the world is simply producing too much oil, or whether the global economy is not strong enough to consume it fast enough. Also, if prices keep falling, will oil producers start cutting back production, which in turn could provide some support for oil prices?

“I still believe what’s happening to oil is related to there being too much supply, but the sell-off is sending ripples through the market about global economic growth,” said Sonders of Charles Schwab.