Interesting article I read on Business Insider on Oil prices stabilize, firm demand counters oversupply that I want to comment on. A drop in oil prices usually result in the slump in economic activity or a imbalance in supply demand. What is interesting is that the overall health of the US economy is solid “B-” up from a “D-” only a few years ago, when oil was much higher. One would think prices would be going the other way. This probably means that the latter is at work. A massive spike in oil production has driven supply up, thus pushing prices down. This dynamic hurts the energy investors but helps the consumer, which should translate in a boost to the economy. Already we have seen a revised up GDP numbers and I think the second half of 2015 should be +2.5% to +3.0%
When I look ahead to 2015, I notice there are several factors that are very promising for the US economy and the US equity markets. I have an old expression “shades of the past”…for me that would be 1999, which was a great year. Looking back, everybody knew the bubble was going to burst, this time around I don’t see a bubble. Here are my thoughts:
1. Interest Rates..Cause and Affect: While its almost a given that the Affect will be the Fed will finally increase rates in 2015, the cause will be the US Economy will have officially (and finally) recovered from the “great recession” of 2008-2010. Expect unemployment to drop to under 6%, GDP climb to over 3% and fed rates to go up 1 to 1.5%. Rates will still be historically low, so the trade off is one we can live with (and in some ways hope for)…a much stronger US economy.
2. Housing and Construction…the US economy’s “supertanker” finally seems to have turned and should fire on all cylinders. Despite the rise in rates, housing and construction is finally back. Inflation should also pick up a little, which is also good for housing and construction. Demand for new homes will pick-up as household formation picks up. Let’s face it, the kids that have packed Mom & Dad’s house the past 7 years will need a place of their own. This should drive multifamily.
3. Financial Stability (somewhat)…unlike Europe where the banking crisis still haunts the balance sheets of the big banks, the US took its medicine and our banks are back in business. On a resent trip to Europe, I was amazed at how many bankers believe the Euro will go to parity with the US Dollar. I’m not sure if it will be this year, but who knows. This is driving investment into the US.
4. Energy Prices. A spark of the great recession in July 2008 with oil prices over $140 a barre, oil is now under $60 and may be at these levels all year. This will put tens of billions of dollars of dispensable income back into the pockets of the American consumer which should help our consumer driven economy. Better we spend money here than ship it over to the Middle East and Russia!
5. International Stability…at least it feels that way. Obviously, there are hot spots across the globe. Russia and the Ukraine, Isis, North Korea, etc. But when you read the headlines recently, the worst thing is the North Koreans hacking Sony pictures. (By the way, I watched the Interview the other night, and it was hilarious. And now I know why the North Korean leadership was so upset.)
The bottom line is I feel like 2015 reminds me of 1999, except I don’t see any bubbles. Lets face it, coming out of 1998, when The Globe.com was priced at $9 and opened North of $100, all you had to do was wait for the other shoe to drop. It was a hell of a nice run from January 1999 until the wheels came off in March 2000. I think we may see a similar set-up for 2015. I expect to see the DOW over 20,000 and the NASDAQ over its March 10th, 2000 peak of 5,142 this year.
Happy New Year To All,
Marty Sumichrast, Editor
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