Three trends from 2014 have carried over into the new year and will definitely have an impact on the price of investments in 2015. The strong U.S. dollar, cheap oil and the potential for rising interest rates are the revolving topics discussed in the financial media.
Why is the media talking about it? Each of these factors individually could cause market volatility, hobble a recovering economy and force a sell-off of assets. Collectively, they pose a threat that could stall our progress since the Great Recession, or worse, cause a retracement of the gains we have seen in the bull market over the past five years. Understanding the factors at play and how they may impact your portfolio will allow you to position your investments appropriately. This is particularly important if you plan on selling investments to fund your individual retirement account (deadline 4/15/2015 plus extensions for the 2014 tax year) or still need to rebalance your portfolio for 2015.
Strong dollar. A strong dollar is great for travelers, but bad for companies that rely on exports to fuel their revenue. The U.S. has long since shifted from a manufacturing-based economy to a service-based economy, so the export risk is not as great as it once was. However, commodities produced in the U.S., such as corn and wheat, could see a loss of demand if the strong dollar continues throughout the year.
Retirees and others travelling internationally will see their dollar go further as the greenback has appreciated against the euro, yen and many other leading currencies. This may compel folks who have been contemplating taking a trip to finally do so. If we see this temptation lure retirees into travelling, we may see increased performance from sectors such as travel, hospitality and leisure.
A strong U.S. dollar could continue to offer opportunities for substantial investment gains within the travel, hospitality and leisure space, along with a reason to indulge in a trip internationally.
Cheap oil. Cheaper oil has helped consumers considerably, thanks to the savings enjoyed at the pump. However, those savings are not good for producers of oil and gasoline. At particular risk are smaller companies that took out debt obligations that made them profitable when oil was trading above $80 per barrel. Today, oil has retrenched to trading at just under $50 per barrel. Compounding the issue for producers, the supply of new oil coming to market has not decreased. Large producing companies and countries alike have said that they will continue to produce regardless of how low oil goes.
In reaction to the oversupply of oil, we are seeing the number of oil-producing rigs decline, according to a recent Baker Hughes Inc. report. It will take time to feel the true effects, but low prices will continue to affect large integrated oil companies.
Although producers are feeling the sting of low oil prices, some auto manufacturers have seen an increase in their stock price while oil has been falling. Given that the average age of an American car is 11.4 years, according to an IHS Automotive study, we may see more consumers replace aging cars. Extra income from savings at the pump and consumer confidence are reasons for to be optimistic about select auto manufacturers.
Rising rates. According to the latest U.S. Federal Reserve Federal Open Market Committee minutes released in January, there is still a possibility interest rates will rise in 2015. The number of factors effecting if and when rates rise is nearly endless, however six years after taking, in the words of Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart, “extraordinary policy measures,” which resulted in adding over $4 trillion to the balance sheet of the Fed, investors are anxiously awaiting a decision to “normalize” its interest rate policy.
An increase in rates could make the cost of borrowing more expensive for consumers and businesses alike. Businesses ranging from financial institutions to home builders could all be affected by increased interest rates. The degree to which they are affected depends on each business, industry and the economy as a whole.
On the plus side, typically when interest rates rise, it is a sign of a healthy economy. With consumers feeling more confident and willing to spend, this could be viewed as a good sign for the U.S. equity market. Leading economic indicators, such as housing starts, consumer sentiment and gross domestic product, or GDP, are figures that will provide an indication of where the economy may be heading. Although you don’t need to be an expert on what each of these indicators mean, it’s helpful to understand what they represent and where the numbers come from in order to understand where “experts” are drawing their opinions from.
As you can see, the U.S. economy seems to be at a pivotal moment, with multiple underlying trends that could pull it into a slowdown or push it to accelerate. Ongoing meddling by the Fed and global central banks will continue to effect interest rates and equities alike. Investors should always have a plan, while keeping an eye on both the opportunities and threats that a strong dollar, cheap oil and rising rates pose. Good luck, investors.
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