By Charles Webb
As we conclude 2014 and look back over the year, much remains the same as in the previous couple of years. Global politics and strife seem to be in the headlines every day. Political divisions remain in Washington which has led to more legislative gridlock. European debt and lackluster growth are threatening the currency union and questioning the long-term viability of the Euro. And finally, the Federal Reserve looks for ways to exit the capital markets and let interest rates rise to more normal levels.
So as unsettled as the world seems, there was actually little reason for the U.S stock market to get derailed in 2014. It's important to keep in mind that the stock market is always forward looking and as such, it hates uncertainty. Good or bad, uncertainty leads to volatility (up or down). 2014 was a year in which we saw relatively little volatility in the overall stock and bond markets.
This is not to say that there weren't eventful moments during the year. Most notable was the drop in energy prices. Back in June 2014, the price of Brent crude was up around $115 per barrel. As of this month, it had fallen more than half, down below $50 per barrel. This has been a huge story and we think will be the main driver of the fundamental factors effecting stocks in 2015.
Ironically, the initial selloff in oil back in June spooked the markets due to the severity of the decline. Investors worried that this was due to a lack of demand that portended a significant slowdown in global GDP. The stock market actually declined in the third quarter based on these worries.
While these GDP concerns were partially justified, the primary reason for oil's decline was more and more new production making its way into the market. In addition, this new production was coming from non-OPEC sources - primarily the United States. This meant that the traditional oil cartel nations could do little about controlling the supply glut as they typically would in response to a decline in demand. In fact, OPEC has responded just the opposite by announcing at their last November meeting that they would continue current production levels in order to protect their market share and to try and drive out the more expensive sources of production (mainly U.S. hydraulic fracturing).
The oil price crash is a very big deal and is now upending the global economy, with ramifications for every country in the world. Low prices are excellent news for oil consumers in places like Japan or the US, where gasoline is the cheapest it's been in years. But it's a different story for nations reliant on oil sales. Russia's economy is facing a potential meltdown. Venezuela is facing serious unrest. Even better-prepared countries like Saudi Arabia could face heavy pressure if oil prices stay low.
In the U.S., cheaper energy prices are going to have a significant positive impact on our economy. It is estimated that U.S. drivers will spend $550 less per car in 2015 than they did in 2014. That will give consumers more money to spend on other things. Businesses that ship their products will see a huge benefit with lower transportation costs. Transportation companies will obviously see lower operating costs. The travel industry should experience higher volumes of traffic. Oil is also a major input in the production of everything from plastics to fertilizer. Farming will be cheaper and so on.
We believe that sustained lower oil prices will be the biggest factor driving earnings and thus stock prices in 2015. Oil below $60 per barrel should also create a nice counter balance to other negative forces such as the higher value of the Dollar vs. Euro and a possible Fed rate hike later in the year. While we're not expecting a year like 2013, we do believe stocks should do as well as in 2014 - mid to upper single digit returns.
