The one thing that’s clear about the financial forecasts that experts made for 2014 is that virtually all of them delivered premature advice. Most significantly, projections of rising interest rates and disastrous downticks in bond prices didn’t materialize.
So, when we tell you that projections for 2015 by economic and stock-market experts are strikingly similar to what the pros said would happen for 2014, we wouldn’t blame anyone for thinking, “Yeah, right.” However, the evidence to support such a forecast for 2015 is much stronger than what existed a year ago.
What’s different in 2015 is that Federal Reserve signaled that it no longer plans to prop up the U.S. economy by flooding it with new money and freezing interest rates at record lows. Further, central banks around the world seemingly are following The Fed’s former policy by trying to boost their economies and daring investors to put money overseas. Meanwhile, the bull stock market has become the fourth-longest upswing in the past 80 years, reaching record highs and raising experts’ concerns that the market is more likely to go down than to keep rising. Such a market environment puts a premium on picking the right stocks over buying a basket of stocks, such as an index fund, based on an expectation that a surging market will generate gains. In addition, investor-sentiment gauges show that consumers feel better about the stock market than they did even during the highflying 30-plus percent surge in 2013.
When investors are feeling bulletproof—as they appeared to be at press time after the market avoided a late-2014 meltdown and rebounded to new highs in October 2014—it’s typically time to invest in Kevlar suits and look for a bunker. That’s because the market historically punishes overconfidence with increased volatility, if not an outright downturn (although not a major collapse).
If you ignored the prognostications for 2014 and didn’t change your tactics, you weren’t punished for your inactivity, because 2014 proved to be a decent year just by sticking with what had worked during the booming market of 2013. We believe that you might not be so lucky letting things ride in 2015. Consumers will encounter rising interest rates and an improving economy at a time when a bull market is aging and you have a little extra disposable income because of a decrease in gasoline prices. How should investors navigate all of those factors in 2015? Read on.
RISING RATES. For all of the talk of interest rates rising, the earliest that The Fed is likely to move is mid-2015. Fed Chair Janet Yellen said in March 2014 to expect no interest-rate increases until 6 months after the central bank was done with quantitative easing. Quantitative easing is the aggressive bond- and debt-buying policy that The Fed has used since the global financial crisis of 2008 to prop up the economy and, in turn, the stock market. Quantitative easing held interest rates low and dared consumers to buy stocks rather than “fight the Fed.”
Retirement Investing in a Rising-Rate Environment
The Fed began to empty the punch bowl that’s quantitative easing in fall 2014. If you add a few months for Yellen to make sure that the economic data are stable before you start the 6-month countdown clock, then the earliest that you should expect to see a rate hike is June 2015. Barring a sudden change in employment data, The Fed will hold out for as long as possible to make sure that the stock market doesn’t crack when rates finally move. The waiting game is designed to let Wall Street anticipate the moves and price them in before they happen, so the actual rate hikes don’t create massive volatility, like what happened in 2012. That year, former Fed Chairman Ben Bernanke’s hints at a change in policy sent the stock market into a tizzy.
Removing quantitative easing won’t end the investment party, but it changes the refreshments. For savers and investors, the results will look appealing compared with what has been available for nearly the past decade, but they won’t quench your thirst for larger, safer investment gains. For example, in the final months of 2014, banks started to advertise rates on 3- and 5-year certificates of deposit (CDs) as though a return of 1.4 percent were something to cheer about. Such returns aren’t, because, at such a rate, it will take at least 50 years for you to double your money.
Greg McBride, who is the chief analyst at Bankrate.com, cautions against being sucked in by early offers for longer term CDs, because doing so will lock up money at a yield that will be too low when The Fed finally moves in 2015. The consensus among experts whom we interviewed is that The Fed will take two steps up the rate-hike ladder, each likely to be 0.25 percentage point, by the end of 2015. The first of the two rate hikes could come as early as June 2015, says Russ Koesterich, who is the global chief equity strategist for investment-management company BlackRock.