While 2014 had been at times rocky for the stock market, investors look set to come out on top again. On the last day of 2014, the S&P 500 was up 12.7%, having recovered from a slow start to the year and two major sell-offs on plunging oil prices in the fall. Looking ahead to 2015, there is at least one good reason to expect the market to outperform.
The economy is finally hitting its stride. The unemployment rate has fallen to 5.8%, below the Federal Reserve's target of 6%, and the economy is on track to add 2.9 million jobs for the year, its best mark since the late 1990s. November's job growth of 321,000 was the best monthly clip in three years, and third-quarter GDP was revised up to 5%, the fastest growth in 11 years.
While the number of long-term unemployed Americans and those working part-time jobs but looking for full-time work is still higher than normal, the economy is rapidly headed toward full health, which should help boost corporate profits next year.
In that context, let's look at three developments that will likely have an outsize effect on the stock market in 2015.
1. Oil prices
The price for a barrel of West Texas Intermediate crude fell to $53 on the last day of 2014, down from around $105 in the summer. Prices started falling in the second half of the year due to increasing supply from North American shale producers and a slowdown in China's economic growth, and then tumbled when OPEC said it would maintain production levels in order to keep prices low and pressure American producers.
No one knows for sure where oil prices are headed, and an unforeseen event such as a military conflict could always force a spike, but most predictions call for crude prices to remain low throughout 2015. The U.S. Energy Information Administration now predicts an average West Texas Intermediate price of just $63 per barrel for the year, down from $94 in 2014. Meanwhile, the International Energy Agency recently lowered its demand forecast for 2015, noting that lower prices would not spur a sufficient recovery in demand and could cause turmoil in countries dependent on exporting oil, such as Venezuela and Russia.
The effect of the low price of oil will continue to be widespread. Not only should it ensure a high level volatility in the market, but it will also pressure energy stocks and lift sectors such as airlines and transportation, which will save a bundle on lower fuel prices. Lower gasoline prices will benefit the middle and working-class consumers, and therefore provide a shot in the arm for retailers, particularly those such as Wal-Mart that cater to lower- and middle-income consumers. Despite the growth in U.S. energy production, the economy is still primarily based on consumer spending, and so lower oil prices are a net positive for the country. The Wall Street Journal estimates that GDP would expand by $90 billion if oil prices fell to $71 for 2015, and consumers are likely to save close to $100 billion.
2. Fed interest rates
Do you remember all the panic surrounding the Federal Reserve's taper of its former $85 billion bond-buying program? Get ready for another round of worry.
In the months leading up to the taper, speculation engulfed the market, leading to large swings on days the Fed Open Market Committee met, and even after the taper began many worried it would sink economic growth. That didn't happen.
Now the market is worried the Fed could spoil the party by raising its benchmark interest rate, and stock prices have shifted as traders bet on when the inevitable decision to raise interest rates comes. The Fed had kept its interest rate near zero since the recession in order to encourage borrowing, and that benefited the stock market by keeping bond yields low. Therefore, higher rates could cause some money to move out of equities.
That might be justification for concern, but history shows rising interest rates have hardly any dampening effect on the stock market. A study by portfolio manager Ben Carlson found that since 1957, stocks have increased in periods of rising interest rates nine out of 11 times, and that the average annual return during the periods combined was 9.6%, just shy of 10.1% average annual return from the S&P 500 since 1958. Other studies have shown that the market tends to fall in the week after a Fed rate hike but then rise over the next one to three months.
So expect plenty of chatter about the Fed's rate hike, which is expected sometime in the middle of the year, but it shouldn't affect your long-term investing decisions.
With every passing year, it seems security hacks have become more prevalent. A security breach of data and credit card information from more than 100 million customers late last year cost Target $148 million, according to its own estimates, and damaged the company's reputation and customer relationships.
A few months ago, Home Depot reported a similar attack, saying that 56 million credit cards might have been compromised over the span of five-month malware attack on its terminals. More recently, Sony was victimized by North Korean-sponsored hackers in response to its planned release of the movie The Interview, a breach that not only revealed sensitive personal information of Sony employees including high-profile actors, but also proprietary content such as movies. On Christmas, Sony got another dose when a hacking group called the Lizard Squad attacked the company's PlayStation systems and Microsoft Xboxes.
After such high-profile attacks, cybersecurity should be near the top of every CEO's agenda in 2015, especially those in retail and other consumer-facing businesses. In some ways, this presents an opportunity for companies such as Apple, whose Apple Pay system adds another level of security to credit card transactions.
Unfortunately, security attacks are unlikely to ebb anytime soon as viruses and other tactics become more complex, but increased awareness by consumers and companies can help reduce the threat. For businesses, though, cybersecurity might represent another unwanted expense to the bottom line, but the cost of an attack is still much higher than cost of preventing one.