In a light-volume and uneventful Friday, the stock market kicked off 2015 with a mixed and mellow performance that left the Dow slightly higher and the Nasdaq and the S&P 500 lower. It was a quiet day on Wall Street, and it was no surprise to see a calm day to close out two holiday-shortened weeks. The question now is what awaits investors in 2015, and already some major themes are in place. One of the big stories in 2014 was the nearly 50% decline in the price of oil, and it was interesting to see oil fall nearly 1% on Friday to the lowest levels for light sweet crude since April of 2009. Oil price declines have both positive and negative ramifications, so you can bet that oil will remain on the radar of financial markets as we head into this New Year.
Friday’s economic news did little to fire up the bulls on the first trading day of the year, and it was disappointing to see the manufacturing ISM report for December come in at 55.5% versus the 57% reading that economists had expected. That number was down from November’s 58.7% number, so that was a bit of a negative for the stock market on Friday. Likewise, November’s construction spending fell by 0.3% versus the 0.2% rise that analysts had expected, which was also down from the previous month’s 1.2% rise. The flat close on Friday left the major idices down for the week, with the Dow down 1.2%, the Nasdaq off by 1.7% and the S&P 500 about 1.5% lower.
So, what does 2015 hold in store for investors and financial markets? There are winners and losers with regard to falling oil prices, and so far, big oil producing countries like Russia, Iran and Venezuela are being squeezed hard. Likewise, many energy companies are already cutting revenue and profit estimates for 2015, and there is a lot of buzz about oil exploration stopping and production being halted. The oil shale and fracking boom in the U.S, is feeling the pressure of price declines as well, so there is a chance that the American “oil miracle” could find itself at least temporarily on hold. Low oil prices are great for consumers at the pump, but again, these oil price declines can have unintended consequences around the globe.
There are also many economists who are saying that the oil price decline is a clear sign of a global GDP slowdown. We all recall how global GDP slowdown fears in early October walloped stock markets, so that same fear could emerge as a renewed fear in 2015. Granted the U.S. posted an impressive 5% GDP growth rate toward the end of December, but most of the rest of the world is seeing a lot of economic weakness. The European Central Bank’s Mario Draghi was out there on Friday hinting very strongly that the ECB would be launching a massive round of bond-buying sooner rather than later, and that is just one more sign that central banks are still running scared. Draghi said he would “do everything it takes” to keep Europe humming, and it appears that he will do so.
Another “theme” that is taking center stage has to do with Russia. Tensions between the West and Vladimir Putin have not gone away, and if anything, they could heat back up in a blink. The Russian economy is getting hit very hard by the fall in oil prices, as well as by the many sanctions by the West over Russia’s dealings in Ukraine. That conflict seems to ebb and flow back and forth between calm and escalation, so it would not be all that surprising to see Russia take actions that could rattle European and global financial markets if it feels too backed into a corner by falling oil prices and Western political maneuvering.
Also on the 2015 “worry list” are the Middle East in general, Israel, Syria, Iran, Iraq and terrorist groups like ISIS. These are just a few of the global “hot spots” that could cause those “global shocks” that can also cause problems for financial markets. Throw in the fact that the current bull market, at nearly six years old, is aging. It has been a long time since we have had a 2008-2009 caliber downturn, so that is just one more worry to keep in mind. The stock market has been nearly bulletproof for many years, and we have seen bounce back after bounce back, so the odds seem good that the stock market will continue to hold its ground.
The Federal Reserve has hinted strongly that it might begin raising interest rates by mid-year, and as long as the economy remains strong, an edging upward of interest rates might not have that dramatic of an impact. There is no inflation anywhere in sight, so the Fed is under no pressure to raise interest rates. That is a big plus since the Fed will not likely be “forced” to raise rates anytime soon. This should give the Fed some flexibility with regard to rate hikes, which has many bulls optimistic that the stock market will hold its own or even continue to rise even if the Fed does begin a rate hike program in 2015.
So 2015 may have started out on Friday pretty quiet, but the positives seem to outweigh the negatives right now. The U.S. economy is doing well, earnings have been good for the past few quarters, and growth appears strong. There will be surprises and challenges along the way in 2015, but that was how 2014 played out, and 2014 turned out to be a great year for the stock market. The Gorilla wishes each and all a Happy New Year and a restful final weekend of the holiday season. We will be back in action on Monday, as we head into this exciting new year of 2015!