With 2014 winding down, some economists are starting to make predictions for the global and U.S. economies in 2015. You might be able to get a jumpstart on investment strategies for next year by considering what these economists are forecasting for the year ahead.
How Things Look Now
Here in the U.S., the economy appears to be on a roll heading into the New Year. In late October, the government announced that the U.S. economy grew at a healthy 3.5 percent annual rate in the third quarter, which was higher than most economists expected. This came on the heels of 4.6 percent growth in the second quarter. These back-to-back strong growth reports have led many economists to conclude that the U.S. economy has finally turned the corner and may be on solid footing for the first time since the Great Recession.
Given this strength, the International Monetary Fund (IMF) is now predicting that the U.S. economy will grow by 3 percent in 2015, which would be the best annual economic performance since 2005 — or two years before the recession began.
Unfortunately, most of the other major world economies do not appear to be as healthy as ours right now. For example, Japan’s economy contracted by 7.1 percent last quarter, Italy has fallen into recession, and France saw zero economic growth in the first half of the year. Russia is now on the brink of recession due to sanctions imposed in response to the ongoing conflict in Ukraine, and even red-hot China is seeing growth start to decelerate.
Given this weakness, the IMF recently reduced its forecast for global economic growth from 4 percent to 3.8 percent. The IMF is particularly pessimistic about growth prospects in Germany, France and Italy, the Eurozone’s three largest economies, as well as Japan, Brazil and Russia. In fact, it puts the probability of the Eurozone entering recession during the next six months at a startling 38 percent.
Meanwhile, the performance of the stock market in the U.S. since it bottomed out nearly six years ago has been nothing short of remarkable. Since hitting bottom in March of 2009, the Dow Jones Industrial Average is up about 165 percent, the S&P 500 has risen about 200 percent, and the NASDAQ has soared by about 260 percent. Even the sharp selloff that took place in early October was only temporary, with the Dow and S&P 500 both back in record territory by Halloween.
It is worth noting that the positive economic indicators here in the U.S. and the soaring stock market could be masking deeper economic concerns. For example, while the unemployment rate has fallen from double digits to 6.1 percent, other employment gauges reflect persistent weaknesses in the labor markets. These include high numbers of unemployed who have been out of work for six months or longer and higher numbers of underemployed and part-time workers who want full-time jobs.
Other big concerns among many economists are stagnant wages for most workers and the growing income gap between wealthy Americans and everybody else. While many wealthy Americans are enjoying the stock market boom, for seven out of 10 Americans, inflation-adjusted hourly wages are still lower than they were in 2007. However, inflation rose during this time by 15 percent. In addition, wages for workers at every pay level except the bottom 10 percent fell between mid-2013 and mid-2014.
Probably the biggest unknown that will affect the stock markets at some time next year is when the Fed will raise interest rates. On March 18, the Fed will announce whether it will raise rates from zero. If it decides to raise rates faster and sooner than expected, the stock markets could sell off, perhaps drastically. However, if the Fed waits until later in the year to raise rates, like perhaps next October, this might allow investors more time to adjust their expectations for the rate increase, and thus avoid a sharp selloff.
Given the fact that it is not a matter of if, but when, interest rates rise, some experts suggest that investors focus on industries that tend to do well in a rising rate environment. These typically include consumer discretionaries (like automobile manufacturers), energy producers, and banks and financial services. Bank stocks, in particular, could soar when rates start to rise.
Of course, rising rates will increase returns on cash equivalent investments like certificates of deposit (CDs) and money market and bank savings accounts. In the ultra-low interest-rate environment, these instruments have yielded very little for conservative investors, who will welcome rising rates.
As for bonds, some experts recommend constructing a bond ladder in a rising rate environment. This is a series of bonds that mature at regular intervals over the next year — for example, at three-, six-, nine- and 12-month intervals. Each bond is then reinvested at a new, higher rate as interest rates rise. The same strategy can also be used when buying CDs.
Nobody has a crystal ball to see into the future and predict exactly what is going to happen in the economy and investment markets in 2015. However, by keeping an eye on key economic indicators and their direction heading into the new year, you can start to get a pretty good idea of how the economy might perform next year — and plan your investing strategies accordingly.