Here's Why You Should Double Down on Stocks in 2015
With almost six years of strong stock growth in the rearview window, it's only natural to wonder about a looming slowdown. Today's bull market is one of the longest in history, after all.
But many savvy observers are convinced the market will grow even faster in 2015. Despite that six-year run, valuations don't appear particularly unreasonable, thanks in part to strong earnings.
The state of the U.S. economy also appears quite promising, due to job growth and rising Gross Domestic Product (GDP) figures.
David Kostin, a strategist with Goldman Sachs, has issued a 2100 price target for the 2015 S&P 500. He believes a growing U.S. economy and increased corporate sales and investment herald good news for investors.
Kostin isn't alone in his rosy projections. Merrill Lynch equity strategist Savita Subramanian recently predicted the S&P will hit 2200. Other analysts have predicted the number could perhaps push 2300.
The last half of December has certainly primed the pump for a powerful 2015. The S&P is significantly outperforming almost everyone's projections, up around 12-percent for 2014.
Two sectors are at the forefront of this surge: health care and utilities. Both are up well more than 20-percent.
Will they continue that surprising growth? That's not a given. Utilities have benefited from rock bottom interest rates. When rates spike, it's likely their performance will lag.
Defensive stocks in general may soon fall out of vogue, as the economy continues to recover and approaches three-percent annual GDP growth. A higher growth environment means cyclical stocks should be primed for strong returns.
With GDP rising almost four-percent in the last quarter, a breakthrough could be imminent.
Flies in the ointment
If most market analysts predict sustained growth, it's time to double down on stocks, right? That's probably a smart idea -- but let's dicuss some potential hurdles first.
There are a few variables that could slow down this bull market's six-year run. Foremost among them are interest rates. Analysts have been waiting for years to see how the market reacts to a move by the Federal Reserve to hike rates. The Fed has signaled such a move could happen in mid-to-late 2015.
One caveat: Rates were also expected to rise last year, so an increase isn't set in stone. While a rate hike is likely, its effects may be mitigated by other factors. Higher currency valuation could tamp down inflation. Cheap oil could also offset much of the impact created by higher rates.
Past history is also a useful guide. The Fed has generally gone out of its way to spur market growth. Fed officials are likely to telegraph any move far in advance, and any increase will likely be small.
Finally, any increase in rates will likely emerge in a favorable economic environment. With corporate profits soaring, capital investment and more job growth could follow. All of which means more expensive borrowing costs aren't likely to pour cold water on market growth.
A question of oil
With oil prices plummeting to stunning lows in recent weeks, it's been a challenge for analysts and investors to keep pace with the repercussions. The S&P has suffered some setbacks as a result of energy sector uncertainty.
Those setbacks have been fleeting, however. The S&P as a whole has surged while the price of oil dropped like a stone.
That may seem counterintuitive. But falling oil prices are in many ways a net positive for the U.S. economy.
Should energy costs continue to decline, investors will likely reap significant rewards in 2015. Though Fed Chair Janet Yellen has said she expects low oil prices to be temporary, it will likely take considerable time before prices recover.
That may be small comfort if you work in the Texas oil industry. On whole, it's good news for U.S. businesses and investors.
There's also a chance, albeit small, that the Fed declines to raise rates should oil prices fail to recover. The U.S. economy is driven by consumers, so cheap oil could be the fuel that leads to supercharged stock growth in 2015.
So where should you invest to take advantage of low oil prices? Market strategist John Stolzfus of Oppenheimer suggests consumer discretionary stocks. Trouble in the energy sector could also spark a run of mergers and acquisitions, something for any savvy investor to keep an eye on.
Betting on a bull
There are a variety of reasons to invest aggressively in 2015. Wider economic trends look promising. Job growth has picked up. Cheap oil may be a boon for business. Valuations are still attractive. The U.S. dollar is strong.
On the flip side, likely interest rate hikes and the uncertainty of the oil market could prove troublesome. On the whole, however, 2015 is shaping up to be another strong year in an historic bull run -- and a great environment in which to buy stock.