Insight 2015: GREAT SCOTT!
The Hollywood blockbuster Back to the Future, released 30 years ago in 1985, has been garnering some headlines lately because its sequel, Back to the Future II, was set mainly in 2015. Although some of the film’s depiction of 2015-flying cars, sneakers with automatic shoelaces, time travel, and the Cubs winning the World Series has yet to happen (sorry Cubs fans), some things about life in 2015 did come true. Flat-panel TVs, hands-free gaming, cameras everywhere, video chatting, and yes, even drones, all appear as staples of everyday life in 2015.
Back to the Future II doesn’t tell us much about the economy in 2015. But how might 2015’s economy compare with 1985’s, which is often thought of as part of the roaring 1980s and, in some respects, a golden age for the U.S. economy?
Although 1985 was only the second full year of economic expansion after the back-to-back recessions of the early 1980s (1980 and 1981-82), the year would see 4.2% economic growth as measured by real gross domestic product (GDP), well above the long-term average (1960-2014) growth rate of 3.1%. The economy created an average of 175,000 private sector jobs per month and the unemployment rate was 7.3% as the year began. The Federal Reserve (Fed) raised rates in early 1985, but then cut rates in the second half of the year, while inflation, as measured by the Consumer Price Index (CPI), ranged between 3.5 and 4.0% for much of the year. Exports accounted for just over 6% of GDP.
As noted in LPL Research’s Outlook 2015, this year is expected to mark the sixth year of the economic expansion that began in June 2009, and that the odds of recession in the next year remain low, suggesting that the current economic expansion may match, or even surpass, the expansion that began in 1982. LPL Research expects real GDP growth just over the long-term growth rate of 3.0%, led by business spending, housing, and the consumer.
The Fed is expected to begin raising rates later this year, and the economy is expected to consistently create between 225,000 and 250,000 jobs per month. Inflation is likely to be pulled down by falling oil prices in early 2015; but later in the year, as wages begin to accelerate, inflation may turn higher. In 2014, exports accounted for 14% of U.S. GDP, nearly double 1985’s level, making the U.S. economy more vulnerable to global growth in 2015 than it was in 1985.
By the end of this year, the expansion that began in June 2009 could possibly become the fourth-longest post-WWII expansion, just behind the 1982-1990 expansion that lasted 92 months. As for the flying cars, time travel, and the Cubs, let’s leave that to Hollywood.
Stock Market Outlook:
In what appears to be a challenging year ahead, reassessment is a necessity to help weather market volatility and to adapt to changing market conditions.
2014 appeared more on track for more ‘normalized’ returns for both stocks and bonds which surprised many investors that expected bond valuations to go down and interest rates to go up- along with the end of the Fed’s quantitative easing program. 2015 may be quite a different story for market volatility with Fed Rate hikes approaching, the strengthening of the dollar, weakening inflation, an oil pricing crisis, economic issues with China, possible risk of war in the Mideast and Europe again entering a mild recession.
Our forecast for the stock market in 2015 is for a 5%-9% return (slightly below historical returns for major U.S. market indices), while we expect flat bond market performance after a strong 2014 for fixed income. Our motto for 2015 is that “volatility is the new-normal,” and that 4%-7% market swings should be expected as we near the peak of this extended economic cycle. We advise investors to buckle-down, deeply diversify and maintain a calm, disciplined and long-term approach to managing their wealth.
For more information on our firm or to request a complimentary consultation please email [email protected] or call (561) 210-7887 today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.