We’ve reached that point in the year when the prognosticators, pundits, crystal-ball gazers and the doyens of Ouija-board expertise peer into the new year, forecasting their economic predictions for 2015.
Recent weeks have brought an overload of just such exuberance for 2015. I’ve read or heard commentators calling for another great year in stocks, for all sorts of reasons ranging from the blowout (and laughably manipulated) GDP data that showed shockingly fast 5% growth, to Federal Reserve policies that will propel the markets even higher.
Where we really end up when December 2015 concludes, who knows? Up sharply? Down marginally? Flat? Whatever the ultimate destination, I will say this: 2015 promises to be a very volatile year for investors. If you don’t expect the volatility that’s coming, the downdrafts in 2015 will scare you out of the market.
But, if you expect the roller coaster ride — and the opportunities to go shopping with Wall Street on sale — then you will see 2015 as a year of opportunity.
Opportunity always grows out of market instability and fear … and there are three events now causing substantial crosscurrents that will ripple (or rip) through 2015. They are: U.S. interest rates, Russian sanctions and oil prices — and each promises to impose its will on global financial markets in the new year.
1. The Fed
It’s no exaggeration to say that the world is captivated by our Federal Reserve. When will Yellen & Co. announce the first interest-rate increase? How much will rates rise? What language will the Fed use in explaining future rate increases? Each of those answers will impact the market, and possibly in contradictory ways.
Maybe the monetary arbiters surprise us on interest rates, but disappoint on the language they use. Maybe they use the right language, but announce their first rate hike at what the market thinks is the wrong time.
If the Fed increases by 0.1% — which I think is possible but which no commentator expects — the markets would likely explode higher with giddiness that the free-money-for-everyone-policy is effectively unchanged (the dollar would move lower and foreign stock markets would boom).
But if summer comes and goes and the Fed has yet to act — a shock to everyone — then markets the world over will crumble in a conniption fit over the Fed’s broken promises to act. Or if the Fed raises rates sooner than expected, but in line with the expected 0.25% increase, well maybe that’s good, maybe it’s bad.
Whatever the case, and whenever the increase, the recipe the Fed ultimately constructs means volatility in the market, either up or down, and possibly violent in either direction.
What game the Saudis — and OPEC in general — are playing is unclear. Are the Arabic Saudis aiming to cripple their mortal enemies, the Persians of Iran? Are the Saudis aiming to hurt the oil-dependent Russians, for whom the Saudis have no lost love? Are they aiming to bankrupt high-cost U.S. shale producers who have screwed up the supply/demand balance in the world?
All of the above?
The answer is ultimately irrelevant. The dynamics of the oil patch (oil is getting more and more expensive to find and produce) and the economics of OPEC nations including Saudi Arabia (they ALL need dramatically higher prices to afford the social-spending priorities in their budget) means oil prices are destined to go higher at some point.
Maybe OPEC cuts production to force prices higher when the pain in local budgets is too great. Maybe low oil prices — which are already shutting in production in the U.S. and seeing drilling rigs mothballed — cuts U.S. production so dramatically that even if OPEC never slows its own wells, daily global production tumbles below daily demand … once again forcing prices higher.
Those are the two likeliest options. One will emerge the winner. And either means volatility in the stock market, because those betting against oil prices will rush to cover themselves as losses mount.
And in the meantime, if oil prices continue to slide, that will create its own volatility. Low oil prices are just as detrimental to the global economy as high prices. Low prices create unemployment and reduce capital spending in the oil patch, and lead to social instability in certain countries and declining government revenues.
So, no matter the direction of oil, we’re looking at volatile stock markets.
The U.S., Europe and Russia all over-played their hands in the tussle over Ukraine.
Russia is now on the brink of a currency collapse that would rip through the economy … and it would rip through Europe, which is already struggling because of Russian sanctions and which, despite the U.S. press missing the real story, is none too happy with Washington’s heavy-handed insistence that European leaders toe the anti-Moscow line that D.C. has established.
In 2015, we have just two scenarios:
Either Russia, Europe and the U.S. come to amicable terms (and that will likely be because of Europe’s insistence that Washington finally butt out) … or the Europeans and Americans make a massive miscalculation and allow Russia to collapse.
Both outcomes create volatility around the world, including in the U.S.
An amicable solution means sanctions end and European stocks rally hard while the U.S. rallies a bit on sympathy.
If Russia collapses, stocks get crushed in a quick sell-off that will be tied to a Russian bond default that ripples through European investment firms that own Russian debt. The resulting economic crisis in Europe will be so intense that even the European Central Bank cannot alleviate it with its money-printing policies. That will ultimately hurt U.S. markets because of the backlash, and it will destroy emerging markets such as Asia, Brazil and Mexico because of the guilt-by-association that always happens in the emerging markets when one country defaults.
That’s lots of volatility — up or down — regardless of what comes in Russia.
2015 = Volatility
These crosscurrents mean we’re all going to be fighting through a lot of noise in the stock markets in 2015. Unlike much of the noise I routinely warn you to ignore, this noise will be meaningful and have direct impacts on investor sentiment.
So be prepared.
All of these events are ultimately transitory. They will flare up and scare investors, which will send prices tumbling and have the media wringing its hands. But each will be a great opportunity to buy stocks on sale, particularly in Europe, Russia and Asia. Those are the markets today with the greatest potential to give you outsized gains in the year ahead.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker
Enter your email below to get The Sovereign Investor Daily absolutely Free!