“Expect the unexpected” might as well have been the economic mantra for 2014.
It was the year of a record-setting stock market rally, plummeting oil prices, increasing employer confidence and a strengthening U.S. economy that outpaced analysts’ expectations.
While these factors are fueling investor optimism going into the New Year, can we expect more of the same—or will the economy throw us some curveballs?
While we can’t throw out any 2015 stock market predictions, we can make some educated guesses on what lies ahead on the financial landscape by picking the brains of some of the country’s top economists.
So we asked three well-known market watchers—Bernard Baumohl, chief global economist for The Economic Outlook Group; Francisco Torralba, an economist at Morningstar; and Steve Cochrane, an economist and managing director at Moody’s Analytics—to weigh in on the top trends they believe could impact portfolios in the coming year.
Trend #1: The bull market isn’t over—but it may be weaker.
2014 was the third straight year the S&P 500 scored double-digit gains, ending the year up 11.4%. The tech-heavy Nasdaq was up 13.4%. And although the Dow Jones Industrial Average slid in December, it still recorded its sixth straight year of gains.
Despite a volatile January start, all three analysts believe that stocks will continue their solid gains as the U.S. economy continues to strengthen.
“Rarely have we seen such an alignment of positive economic factors in the U.S.—low inflation, low interest rates, lowering gas prices, rising employment and improving confidence by business leaders,” Baumohl says.
But don’t expect a rally as robust as last year’s. Single-digit percentages are more likely, he adds, predicting something close to 7% for the S&P and 9% for the Nasdaq by the end of the year.
The Federal Reserve, however, will have a big impact on how the markets fare. If the Fed raises rates in a sudden spike, Cochrane says, the economy could experience some sudden turmoil.
Trend #2: The job market will get better ... but that may not mean a bigger paycheck.
While 2014 was the best year for job gains since 1999—employment dropped below 6%—all three experts agree this year could be even better.
Job growth, along with paying less at the pump, should continue to drive consumer spending, which is at its highest level since 2008. That said, more jobs doesn’t necessarily translate to a bigger income, and the economists are split on whether workers will see a pay hike in 2015.
Cochrane says he’s seeing a clear pattern of rising hourly rates in states where unemployment has dipped. Moreover, he adds, there’s a labor shortage in such specialized, high-earning occupations as in the tech industry—which could put workers with those skills in the driver’s seat salarywise.
Torralba, however, is less optimistic. “A lot of employment that’s been created has been in low-wage industries like retail, and although fewer people are unemployed, a lot of them are working only part-time,” he says.
Trend #3: Consumers will be geared up to spend.
The uptick in U.S. consumer spending—which accounts for 70% of GDP—bodes well for many business sectors in 2015.
For starters, lower gas prices could lift the hotel, travel and leisure industries, says Baumohl. Big-ticket items, like automobiles, are also showing higher demand.
Next up? Housing, predicts Cochrane.
And it's long overdue for a recovery, seeing as sales have been mostly flat since mortgage rates jumped in 2013. Moody’s forecasts up to a 100% jump in new housing starts in 2015 over last year, pushed up by pent-up demand from Millennials.
This could not only positively impact housing-related sectors like construction but also industries that help you outfit your new digs—think furniture, appliances and interior design.
Trend #4: Overseas economies will continue to rumble.
The galloping U.S. is helping to offset sluggish growth in other regions, particularly Europe, Japan, Russia and Brazil, which all had their share of financial trouble spots last year.
That said, investors can still find opportunity in international holdings, as governments take action to lift their sputtering economies. For one, Baumohl expects Japan and the Eurozone will improve, aided by the drop in oil prices and their central banks’ stimulus plans.
China’s growth, meanwhile, has slowed down, despite taking over the U.S. as the world’s largest economy. However, the country’s growth still outpaces most nations’, and Baumohl predicts a 6.5 to 7% expansion by year’s end.
Ironically, this could be fueled in part by U.S. demand for exports: As Americans’ pockets deepen, their hunger grows for products with “Made in China” labels.
Overall, the economists are keeping a close eye on international political events that could unravel in 2015, since they stand to have a big impact both on the U.S. and global markets.
Of particular concern? The potential collapse of the current Pakistani government. Russia's economic crisis. ISIS taking over oil fields in southern Iraq. And the threat of Greece withdrawing from the Eurozone.
“We don’t see any threat from within the U.S. or within western Europe,” Baumohl says. “The biggest risks we face that could disrupt economic expansion are the geopolitical factors coming from outside. There’s no shortage of wild cards out there at this moment.”