Happy Holidays! We hope you and your families are well on your way to having all your Christmas shopping finished and ready for a wonderful time with friends and relatives. With the holidays and the new year only a week or two away, we are looking forward to the celebrations, and we are also excited about the new investment challenges and opportunities that await us in 2015.
Since this is our last “Notes” for 2014 we thought it would be interesting to try our hand at some 2015 predictions, even though Yogi Berra, the New York Yankee baseball hall-of-fame player and coach famously said, “It's tough to make predictions, especially about the future.” Truer words have never been spoken. But let’s not let that stop us.
Prediction #1: Oil will trade at $50 per barrel early in 2015, only to rise back to $85 per barrel in late summer. Rationale: The flood of oil (pun intended) from US shale fields combined with OPEC’s decision not to cut production has pushed the prices of both West Texas and Brent Crude from over $100/barrel to below $65. OPEC’s decision appears purely predatory—it wants to force US producers to cut production or go out of business. While the low break-even costs of existing production suggest even lower prices ahead, US producers are already taking rigs off line as prices drop. Look for industry consolidation (mergers and acquisitions) and for oil prices to move back to $85 in the summer months as supply and demand imbalances sort themselves out.
Prediction #2: Japan will outperform developed Europe in 2015. Rationale: While both Japan and Europe are experiencing sluggish economic growth and deflationary pressures, Japan has a clearer path for government-sponsored economic stimulus. In October Japanese Prime Minister Abe made a surprise rate cut in response to Japan’s poor GDP growth, a move which positively impacted equity markets both in Japan and the US. In Europe multiple countries must agree in order to enact any significant stimulus. So even though Mario Draghi is fully committed to European stimulus, he is limited in the scope, as Europe’s member countries are not unified. Advantage: Japan.
Prediction #3: The US bond yield curve will flatten in 2015—that is, long-term interest rates will remain stable as short-term rates rise. Rationale: Supportive economic data, such as the most recent jobs report, will give Fed Chair Yellen and her cohorts confidence to begin raising short-term interest rates in mid 2015 (April or May). In the meantime, Europe, Japan, and China will pursue easy monetary policies to assist their own growth. This easing will keep their interest rates low, while our Fed is raising rates here at home, making both the US dollar and longer term US bonds attractive to foreign investors. Result: while short-term US interest rates rise, long-term rates will remain relatively steady.
So there are our predictions for 2015. Japan will be a better place to invest than Europe, oil will continue to be under pressure for the first half of the year before returning to more profitable levels, and the Fed will raise rates in April or May of 2015, but long-term US rates will not move dramatically. We will see how it plays out. We all know the old saying, “ It’s better to remain silent and be thought a fool than to speak and remove all doubt,” but we just couldn’t help ourselves!
Merry Christmas and Happy New Year!