While we still have a few trading days left in 2014, it is now time to prepare for 2015. There is always some excitement and anxiety as we turn the page on the calendar, but, as it relates to markets, we can pretty much rely on the same patterns and current themes.
My entire process revolves around Federal Reserve policy. Each year around this time, I look at the current policy and try to figure out whether or not there will be a big change in the upcoming year. Fortunately, the great transparency of this Fed makes it less of a guessing game.
So, it appears rate hikes could start this coming year, and while that might concern market players to an extent, it is really just about removing the extraordinary accommodation that has been in place for more than five years. The jobs market is improving, the economy is posting great numbers, and prices are stable. The Fed’s current policy is working effectively to address their two mandates of price stability and full employment.
With bond yields so low, the market is telling us inflation is not an issue, prices are stable (and may be headed lower into a disinflationary scenario), and fixed income investments are rather safe. Many have been alarmed by the selloff in high yield, but I’ve heard from many savvy and smart fixed income managers, and they believe this could be the best trade/investment of 2015.
I was taught long ago to avoid high yield/junk going into a recession and to load up coming out of one. Well, with the current growth in the economy, we can certainly say we are not heading to a recession, at least not in the next twelve months (barring any extraneous geopolitical shocks or natural calamities).
In Part II next week, I will cover equities, sectors, and groups that might perform well and not so well in the year ahead.
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