In last week’s post, I took a look back at 2014. While many Americans were worried that the economy and the markets were in terrible shape, things were actually … pretty darn good. Economic activity was strong, unemployment declined, the US markets were up, and we made some significant progress on social justice and environmental sustainability fronts as well.
That’s great, of course. But what about the near future? What about 2015?
First, before I say anything at all about the year ahead, I need to make a big disclaimer: We can’t know the future with any certainty. It’s claimed that the great American philosopher Yogi Berra once said “It’s tough to make predictions, especially about the future”. Short-term predictions about the economy or the markets can easily be overcome by unexpected events; apparent trends that might drive medium-term predictions can fizzle out for no apparent reason. And, of course, all of our portfolio recommendations are made on the basis of our clients’ personal financial goals and long-term expectations lased on similarly long-term historical results — never on short- or medium-term trends.
All that said, lots of us are still interested to hear what the “experts” have to tell us about the coming year.
Economic Factors:
There are only a few economists whose views about the immediate future I take seriously — mostly because they are clear that they really don’t take themselves entirely seriously. But they agree in pointing to five key economic factors, each of which is positive to neutral for the coming year.
- The Chicago Federal Reserve Bank’s “National Activity Index” has been showing above-average growth recently, and shows no sign of slowing.
- The Conference Board’s “Leading Economic Index” has been showing increased economic activity, and shows no sign of slowing.
- Oil prices are low right now, especially compared to recent high prices.
- The difference in yield between “junk” and “investment grade” bonds, known as the “junk spread”, has been falling, except with respect to oil and gas companies.
All four of these indicators seem to show that there is a very low likelihood of a recession coming to the US economy in the next 12 to 18 months.
- The fifth indicator, the shape of the US Treasury Bond “yield curve”, hasn’t changed much at all recently, which is a neutral indicator.
So four of the five doctors agree: recession is pretty unlikely in 2015. There are still good reasons to be concerned about when interest rates will rise, and how far and how fast they’ll jump, but these are smaller worries by comparison. Together with other factors, the low likelihood of recession implies that the coming year could show results much like last year: strong economic production, improving employment, and rising markets.
SRI Factors:
It appears that three key issues will continue to drive SRI investors in 2015. The drive for marriage equality could, conceivably, come to a resolution this year. The US Supreme Court will almost certainly agree (eventually, if not today) to hear the appeals of some important cases, since there is now disagreement among the lower Federal appeals courts. We should know more about the Court’s approach in the next couple of weeks; if they take up the cases, arguments would take place in the summer, and a decision would be expected in the fall. The decline of carbon-based energy, and a shift to alternative energy sources, will probably continue. Mainstream economists are showing that environmental regulation isn’t as expensive as its opponents have always claimed, and arguing that the current period of low prices for carbon energy is a great opportunity to implement a strong carbon tax. And a new era of price parity is arriving, with the cost of wind and solar energy rivalling, even beating, the price of carbon-based energy in more parts of America and the world (today and in the near future). And shareowner advocacy experts appear to be focusing a great deal of energy on the issue of the executive pay gap: the difference between the highest- and lowest-paid employees of a company can show a lot about the importance that company places on good corporate governance, and may have an impact on corporate performance.
In short, I think that there are good reasons to be optimistic about the coming year. The odds of a market-crushing economic recession are low, so the chances of having a good year in the markets are higher. We should be cautious about interest rates, and their impact on bond prices, but we don’t need to panic. And strong progress appears likely to continue with respect to ecological sustainability and social justice issues.
Looking forward to 2015, I’m … well, I’m looking forward to 2015. I hope you are too.
