Equity Prices: Economy In Transit In 2015 by LPL Financial

Since the wind-down of the Great Recession in early 2009, the latest economic expansion has certainly delivered the goods and rewarded investors’ mailboxes with six consecutive calendar years of positive gains for stocks. “Neither snow nor rain nor heat nor gloom of night” has kept a lid on the continuation of one of history’s greatest bull market advances for stocks, and LPL Financial Research believes this trend of rising equity prices may continue in 2015.

Equity Prices Economy In Transit

Equity Prices Economy In Transit

But unlike the last two years, when the global economy produced improved growth on the back of a stabilizing economic backdrop, 2015 will be a year marked by transitions. Likely changes in monetary policy around the world, the return of volatility, and the recent shift in the political balance of Congress could mean 2015 is a year that will have the global economy, markets, and central banks all on the move. To help prepare for rerouting to this more volatile road ahead, our Outlook 2015: In Transit expedites the delivery of the investment insights needed to navigate an economic backdrop shifting to the latter stages of the business cycle.

Equity Prices Economy In Transit

Significant elements that are in transit in 2015 include:

  • The U.S. economy continues its transition from the slow gross domestic product (GDP) growth of 2011–2013 to more sustained, broad-based growth. Ongoing progress in the labor market, an uptick in wage growth, and continued improvement in both consumer and business spending have propelled an uptrend in U.S. economic output. We believe inflation—which has historically accelerated as the economy moves into the second half of the business cycle—is poised to continue proceeding higher, but only modestly so.
  • Central banks around the world will also be on the move in 2015. In the United States, the economy is likely to continue to travel toward a point where the Federal Reserve (Fed) will begin raising interest rates, albeit gradually, for the first time in nine years. The Eurozone and Japan—the world’s second and fourth largest economies, respectively—could benefit, as central banks in those regions embark on more aggressive policy actions aimed at restarting and reaccelerating their long-dormant economies.
  • Washington shifts from a relatively quiet 2014 to take a bigger role in 2015. The Republican takeover in the Senate and approaching debt ceiling limit might provide the opportunity for some movement out of the gridlock that has plagued Washington in recent years.

Equity Prices Economy In Transit

Equity Prices Economy In Transit

Despite significant improvement on almost all economic and market fronts, the route we have been on over the last six years has been undoubtedly long and winding. The package of strong economic growth ordered up following the Great Recession of 2008–2009 has resulted in a delivery that has been at times disjointed and behind schedule. Journeys like the one we have been on since 2009 rarely unfold in a straight line. The reality is that point-to-point navigation often masks the many twists and turns—and ups and downs—that a voyage undertakes, just as the 236% cumulative increase in stock returns since the current bull market began[1][1]  hides the true nature of the market’s successful but volatile path.

Equity Prices Economy In Transit

Transition, like we forecast on the road ahead in 2015, is just another word for change. And while the backdrop looks favorable for continued economic and market advances, we know that not all change is good, just as not all movement is forward. The shifting economic and market landscape in 2015 offers great opportunities alongside major challenges, and investors will need more than just a GPS to navigate them all. As we shift toward the latter stages of the economic cycle in the years ahead, bumps and potholes in the form of rising volatility will be more frequent. Yet it will likely not be the road conditions that throw most investment portfolios off track, as we forecast relatively strong economic growth unfolding over the horizon. Rather, it will be the pull of our emotions that could derail a potentially rewarding journey. As investors, keeping our emotions in check when confronted with a bumpy road will ultimately be the key to success in 2015. It is human nature to weigh the market potholes substantially more than the long, smooth roads of strong market returns between them. However, with an investment strategy in hand and a destination in mind, 2015 is poised to be a volatile but potentially favorable year.

Equity Prices Economy In Transit

To help you prepare for this market in transition, LPL Financial Research has boxed up timely advice into our Outlook 2015: In Transit for an on-time delivery of what could likely be another year marked with positive advances by stocks, flat returns for bonds, heightened volatility, and strong U.S. economic growth.

Equity Prices Economy In Transit

Door-to-Door Delivery

Investment Themes in Transit

Stock prices in 2015 may potentially record their seventh consecutive year of positive returns. Transitioning another year closer to the end of the cycle, large cap and cyclical growth stocks historically outperform.

Global central bank policies will be in focus and will be contradictory. The Fed will use a stronger U.S. economy to set the stage for embarking on late 2015 or early 2016 rate increases, while central banks in Europe, Japan, and emerging markets kick-start their economies with easing policies.

Volatility returns to more normal levels after several years of below-average swings in equity prices.  With only three pullbacks greater than 5% over the last two calendar years, 2015 could be a bumpier road for investors.

Equity Prices Economy In Transit

Economy

3%+ Growth

Consumer and business spending may lead U.S. economic growth to its highest annual advance since 2010.

Stocks

5-9% Returns

Tempered by increasing levels of volatility, stocks are poised to advance mid- to high-single digits on the back of strong earnings growth.

Bonds

Flat Returns       

Battling the dual threat of the Fed’s impending rise in rates and expanding economic growth, bonds offer little, if any, growth potential in 2015.

Equity Prices Economy In Transit

Equity Prices Economy In Transit

Shipping Options: How to Manage, Track, and Deliver Investment Ideas in 2015

Express Shipping: Investment ideas worthy of expedited delivery into portfolios in 2015

  • U.S. Cyclical Growth Stocks
  • Emerging Markets Stocks
  • Credit and High-Yield Bonds
  • Global Macro Alternative Strategies

Bulk Shipping: Investment ideas that should make up the bulk of investor portfolios in 2015

  • U.S. Large Cap Stocks
  • U.S. Mid Cap Stocks
  • Municipal Bonds
  • Merger Arbitrage Alternative Strategies

Fragile Shipping: Investment ideas requiring careful handling in 2015

  • International Developed Markets Stocks
  • U.S. Defensive Stocks
  • High-Quality Long-Term Bonds
  • International Developed Markets Bonds

Equity Prices Economy In Transit