James Paulsen: Investment Outlook 2014

January 7, 2015

2 minute read

Some Thoughts on 2015?

by James Paulsen, Chief Investment Strategist, Wells Capital Management

Welcome to 2015! Here are a few guesses for the new year.

Expect a good year on Main Street but a more challenging environment for Wall Street. U.S. real gross domestic product (GDP) may rise by its strongest annual growth rate of the recovery close to 3.5% to 4%. Current widespread anxieties about the potential for a deflationary spiral are likely to fade as global growth outside of the U.S. also rebounds this year. On Wall Street, good news on the economy may become bad news for investors as anxieties escalate over “inflation/overheat/is the Fed behind the curve” fears.

After a pause during 2014, bond yields should resume the process of reconnecting with the economic recovery started in 2013 when the 10-year bond yield rose from about 1.5% to 3%. Stronger growth both here and abroad combined with a U.S. economy now nearing full employment should force the Fed to begin raising the funds rate by early summer and push 10-year bond yields above 3.5% by year-end.

The stock market is likely to experience a volatile but essentially flattish year caught between the opposing forces of improved economic growth and increasing evidence the Fed may be behind the curve. Similar to past recoveries when the Fed first began tightening (1984, 1994, and 2004), expect the S&P 500 to oscillate in a broad range between 1850 and 2250. While the stock market may end the year a bit higher around 2150, it may also experience a significant correction of 10% to 15% sometime during the year.

Finally, several current consensus beliefs may prove erroneous this year and investors may be able to profit by betting against some of these popular themes. Specifically, we expect most foreign stock markets including the emerging markets to outpace U.S. stocks, for the U.S. dollar to retrace some of its 2014 gains, for a revival in commodity prices including energy prices, and for junk and lower quality bonds to lead in a difficult bond market.