Our 5 themes for 2015 - Surprise! energy and international dominate

5-4-3-2-1! Happy New…No?  We’re not counting down the New Year?  Oh!  We’re counting down the stock market’s five straight down days that guided us into 2015!  As the new year gets underway, we wanted to take a look at some dominant themes that played out in 2014 and that we believe may persist for the first half of this year.

Here are the themes for 2014 in no particular order: the end of quantitative easing; continued economic strength in the US; aggressive stimulus by the Bank of Japan; weak economic data in Europe; sanctions for Russia; falling oil prices; and a strong US dollar.  These were all key market drivers for the majority of 2014 creating mixed global performance and increased volatility worldwide. 

At the 40,000-foot view Bloomberg reported that the S&P 500 index (made up of the 500 largest US-based companies) finished up double digits by year-end, while the MSCI All Country World ex US index (which doesn’t include the US markets) finished down 6%.  Commodities, especially oil, and related commodity companies and countries were significantly down for the year.  In the latter part of the year, the US dollar strengthened, which added fuel to an already increasing negative situation for international investment.  The Yen, Euro, and Rubble all hit multi-year lows against the dollar. 

The sectors that performed exceptionally well during 2014 were transportation, utilities, healthcare and technology.  At the other end of the spectrum were energy, telecom, and metals and mining, all having negative performance last year. 

We came into 2014 thinking for sure that rates would increase during the year.  We were dead wrong.  In fact, rates went lower, with the 10-year US government bond yield recently falling below 2.0%.  It is indeed a rare year when you have both US equity and US bond markets generating positive returns.  It certainly speaks to the power of the Fed and more importantly to global economic concerns.   

Looking forward into 2015, we believe that the prevalent themes will be: monetary stimulus from international central banks aimed at boosting economic growth; continued solid economic performance out of the US, with bumps along the way; the US Fed increasing interest rates; a strong US dollar; and oil price stabilization later in the year.  We will once again look for equity to outperform fixed income, but likely with more volatility than last year.  Currently, the US continues to look attractive.  We will count on the Fed to continue communicating its plans, which currently are to increase rates at a very modest pace, and that any dislocations caused by the drop in oil prices will be taken into consideration. 

While we were not rewarded for our diversification in 2014, we will continue to maintain international exposure for diversification and economic reasons.  We believe that easy monetary policies in Asia and Europe will begin to help their economies and our international investments.  While lower energy prices help household budgets around the globe, oil-related investments have already priced in significant dislocations in their revenue streams.  This should enable large, integrated energy companies to take over select small oil producers on the cheap.  

As for emerging markets, oil-importing countries like China and India should benefit, while further weakness in oil prices hurts exporters like Russia and Brazil. 

On the Chinese calendar, 2015 is the year of the sheep.  Oil price developments may well determine whether this year ends up being a lamb for the global economy or whether it becomes a wolf in sheep’s clothing.