The stock market has experienced some wild oscillations so far this year, including January's big drop, a massive February rebound, and yesterday's 333-point decline in the Dow Jones Industrials (DJINDICES:^DJI). With all the uncertainty in the market, volatility in stock prices won't disappear anytime soon, and three major trends are emerging as the driving forces for stock market moves this year.
1. The U.S. dollar
Currency exchange rates have played a key role in market movements lately, with the strength of the U.S. dollar defying all expectations. The plunging value of the euro, from $1.25 as recently as early December to about $1.05 today, has cut deeply into the dollar-value revenue and profits of U.S. companies that do business in Europe. For many companies, the rising dollar turned what would have been a quarterly profit into a loss, and the downward pressure on earnings and sales has been strong even on some of the largest companies in the nation.
If the dollar's climb continues to accelerate, then more stocks will feel those impacts throughout the market. Economies in Europe, Japan, and China will need faster growth rates before the stampede into the U.S. dollar ends.
Plunging energy prices have had a huge impact throughout the stock market. As oil has fallen below $50 per barrel in the U.S., energy stocks have generally been hammered, with only a few bright spots among companies that benefit from lower petroluem prices. Elsewhere, though, falling fuel costs have had an overall positive impact on companies in the transportation sector.
It will be interesting to see the winners and losers from volatile energy-price movements throughout the year. With plenty of debate over whether oil is likely to fall further or recover quickly, you can expect big swings not just from energy stocks but from the energy customers that count fuel costs among their leading business expenses.
3. Interest rates and the Federal Reserve
Part of the reason why investors are so concerned about currency exchange rates and oil is that both play a role in the Fed's monetary policy. As the U.S. economy has heated up, expectations have grown that the Fed will start raising interest rates sooner than later, and that has contributed to the dollar's strength. At the same time, falling oil prices have not only kept inflation in check but raised the specter of deflationary pressure, making some policymakers reluctant to tighten monetary policy.
The bond market feels the primary effect of potential future rate moves, as 10-year Treasury rates have moved aggressively above 2% in recent days. But many areas of the stock market are also rate-sensitive. With many of those rate-sensitive sectors being traditionally defensive plays, those seeking to avoid market volatility need to keep possible rate changes in mind when investing.
The market appears set for a wild ride in 2015, with many moving pieces determining the overall direction for stocks. Be sure to keep an eye on the dollar, oil, and rates throughout the year to get an idea of which way the markets are likely to move.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.