Last year was a strong year for the American economy and stock market. The last year has given confidence to Wall Street and Main Street alike. Although employment levels aren’t where we would like to be, we have reversed the outflow from the labor force and are now adding jobs to our economy. 2014 has been the year of some major improvements, including ending the asset purchase program. 2015 will be a defining year for the economic recovery and will determine whether we return to a boom cycle or continue a tepid recovery for multiple years.
Economists believed that 2014 would buck the trend of the jobless growth seen in 2013 and reflect a more traditional economic growth trajectory. The unemployment rate dropped from 6.6% to 5.6%. This was a combination of new job creation and individuals leaving the labor force, voluntarily or otherwise. Nevertheless, the unemployment rate drop provided optimism, which spurred the strong stock market performance. In 2015, we will see the unemployment rate level drop taper off and even rise slightly as individuals re-enter the workforce. This is nothing to be alarmed about. As the unemployment rate normalizes, we can depend on it again as a measure of our economy.
Last year was also full of major international events which impacted world economies. China’s deregulation of its capital markets marked a big transition in its desire to become a first world superpower. Although its stock market is still highly controlled, China now allows domestic banks to open branches and issue yuan bonds internationally, support domestic businesses in activities such as mergers and acquisitions and offer shares to the open market. Meanwhile Russia has been making headlines by invading Crimea, the eastern portion of Ukraine, and annexing it to Russia. This has put immense pressure on the international markets. To avoid further catastrophes, Europe and the United States have chosen to engage Russia in non-confrontational ways, which has yielded results to a certain degree. The sudden drop in oil prices is squeezing Russia. Its damaged domestic economy is also depressing its currency, the Russian Ruble. These two effects have forced Russia into complying with international requests.
Job Creation Efforts
2015 is a crucial year for our economic recovery and stock market. While the Federal Reserve has done an incredible job in helping the economy rebound, not every indicator suggests improvement. We are currently in a period of “recovery” called jobless growth. Indicators such as spending and stock market performance indicate a strong recovery, while the deceptively low unemployment rate masks the large amount of people still without jobs (not accounted for). In response, President Obama and his administration have outlined several policies to get people back to work. One such policy is the job skills training grant, to which the President has committed $600M, which gives funding to employers that train graduates to have the skill set necessary to be successful in jobs they are applying to at the company. Another policy recently outlined in the President’s State of the Union address is free community college for two years. Although it remains to be seen whether it will be signed into law, it will give underprivileged job seekers the chance to be educated enough to procure jobs requiring higher education which were inaccessible in the past.
Analyzing the Upside
Ongoing expectations of a market correction led to the stock market experiencing some losses in December 2014. Although January has continued with the negative momentum, there are several fundamental factors, which will contribute to a strong 2015 market performance. The first of these is cheaper oil prices due to an increase in world supply. Cheaper oil prices adversely affects Wall Street, so it is responding by cutting spending and jobs. This effect is outweighed by cheap oil’s benefit to Main Street. Cheaper oil means lower heating bills for consumers, which gives them more disposable income. This disposable income gets recirculated into the market, which is the primary driver for the stronger than expected Q4 holiday season. With our economy recovering, the US dollar has rebounded in relation to world currencies. With a stronger dollar, the United States has a better ability to import more goods and services.
The Soft Spots
While there are several positives to look forward to for 2015, there are a few risks that might pose a threat to market performance, the biggest being potential interest rate hikes. In October 2014, the Fed announced that it would execute its final asset purchase of $15B and then discontinue the program. Although there will be no more asset purchases, the Fed is still keeping interest rates low. The Fed is maintaining their dual mandate approach before deciding the economy is strong enough to increase interest rates. Currently the dual mandate conditions are unemployment in the 5.2-5.6% range and inflation at 1.7-2%.
With the end of the asset purchase program, the stock market will have to stand on its own two feet and there will be erratic behavior with the components of the broad market most likely moving in multiple directions. 2015 will be an interesting year for our economy and while we have several soft spots we need to avoid, it is poised to be a strong year for the recovery effort.
This article is the opinion of the author and is not shared by India Currents or any of its staff. All investors should conduct their independent analysis before taking any actions and should not make any decisions on the information provided in this article alone.
Rahul Varshneya graduated from the Leavey School of Business at Santa Clara University with a degree in finance and works in the tech industry as a financial analyst. If you have feedback or have a topic you would like addressed please contact Rahul at [email protected]