What Could Go Wrong In 2015?
Dealing With Divergence: The Outlook For 2015 (Part 7 of 7)
This is the world as my BlackRock colleagues and I see it. Of course, as is always the case in financial markets, uncertainty is one of the few certainties. In particular, we believe that most of the geopolitical trouble spots throughout the world are ‘frozen conflicts’; few are likely to be reconciled over the next year. Here at home, the big risk would be a quicker tightening campaign by the Fed that takes investors by surprise.
Overall, however, investors should avoid the temptation to cash out all their gains. Stocks may not march upward in a straight line, but we believe they should continue to do relatively well in 2015—and better than bonds and cash.
Market Realist – The outlook for global equities continues to look better than investments in cash and bonds. However, it’s important to know what could go wrong in 2015. Investors should prepare for the possible risks. The following are some headwinds that markets could face this year:
Rise in geopolitical tensions – 2014 has already witnessed the rise of various geopolitical tensions—like the Ukraine-Russia (RSX) conflict, unrest in Syria, increasing prominence of ISIS as a terrorist outfit, aircraft disappearing, and the Ebola outbreak. If the conflicts get worse, it could cause a rise in market volatility (VXX).
Political instability in Europe – The Eurozone (EZU) could become vulnerable to political instability. This could affect the union’s foundation. In Greece, the presidential elections are set for January 25. This could mean the ushering in of a far-left party. This could be a threat to the Eurozone’s stability. Read our series When It Comes To Europe, Look for Value And Expect Volatility to understand more on this topic.
Higher-than-expected rate hike by the Fed – Although the Fed mentioned the word “patient” in its December FOMC (Federal Open Market Committee) meeting in the context of raising interest rates, a strong economy could change everything. A stronger growth rate for the US could mean the Fed raising rates sooner or higher than expected. This could increase volatility in the bond (BND) (TLT) and equity (SPY) market segments.
Growth slowdown in the US – In contrast, if growth is slower than anticipated in the US, it could lead to a sell-off in US markets (SPY). The US Institute for Supply Management’s PMI (purchasing managers’ index) came in lower than anticipated for December. You can see this in the previous graph. The estimate came in at 55.5 in December. This was lower than the November estimate of 58.7. Although an estimate above 50 indicates expansion, worries about how the global growth slowdown will impact US manufacturing can’t be laid to rest. A higher US dollar and a slowdown abroad could cool the demand for US goods. The global PMI was estimated to be 51.6 for December. This is the lowest since August 2013. If the trend continues, it could be a major source of turbulence in the markets. The US economy faces headwinds in the form of low labor participation rates, low inflation rates, and low wage growth.
Read our series How To Prepare Your Portfolio For 2015 for more insight on how investors can prepare their portfolios for the new year.
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