A panel of four Schwab strategists presented their 2015 outlooks for the markets and economy on Thursday in New York, with the consensus holding that the long-running secular bull market will continue into the new year. In addition, they agreed that the Federal Reserve is likely to raise interest rates next year, with fixed income strategist Kathy Jones saying she expects the Fed to start with short-term interest rates, perhaps as early as the late first quarter or the second quarter.
"We expect the Fed to hike short-term rates" in 2015 producing a "flatter yield curve," Jones said, since there are still powerful deflation forces at work "around the world," tempering the Fed's desire to raise longer-term rates. She also pointed out the "divergence in central bank" policies around the world, especially with the Bank of Japan and the European Central Bank continuing their easing policies compared to the Fed.
She also prompted laughter from the audience of journalists and advisors in the audience when she said "I used to hear people say they were worried about when rates will rise; now they can't wait for them to rise!"
However, Jones says her team has been closely watching one part of the fixed income market — junk bonds in the energy sector. "We've been worried about risk-reward in junk bonds; [falling] oil [prices] has just exacerbated" that worry, noting that 15% of the Barclay High-Yield index is represented by energy companies.
Bond traders are seeing "many offers" to sell, Jones said, but "no bids." She warned that investing vehicles like mutual funds or ETFs that hold those energy junk bonds might face a liquidity issue, and that "we've yet to see the ramifications of companies trying to roll over their debt" in the energy sector when the underlying price of oil has fallen so far.
Schwab's chief investment strategist, Liz Ann Sonders, made her continued case that we remain in a secular bull market marked by "ferocious returns" for U.S. equities, though she warned "that doesn't mean we won't have drama," soberly reminding the audience that the 1987 crash occurred during the longest-ever secular bull market.
The U.S. economy, Sonders said, will have less fiscal drag holding it down in the new year since the Fed has tapered QE, and the American consumer "will be fine," partly because of a rise in free cash flow emanating from the decline in commodity prices, especially those lower energy costs.
With consumers still feeling the "muscle memory" of the last two recessions holding them partly in check, she believes we're coming into an "investment-led expansion" rather than a consumer-driven expansion, though "some volatility" remains possible.
"Oil and gas has been a big part of the investment-led expansion," she said, pointing out that 8% to 10% of U.S. companies capital expenditures are in the energy sector, accounting for 1% of U.S. GDP and 24% of the S&P 500.
While oil prices have dropped, she said that "break-evens are in the sub-$60 [a barrel] range" for the major Bakken and Eagle Ford shale oil-producing areas of the country.
