Last week I did a recap of 2014, now comes the hard part, trying to predict the future. In any given year, there will be some people who will provide more accu-rate forecast versus others. Unfortunately, the most accurate forecaster from one year, will seldom be the most precise in future periods.
Some might think, why pay attention to forecasts, given that they are often unreliable. However, there are some variables that are easier to forecast versus others. For example the economic ones, such as GDP, inflation, and unemployment most years can be predicted fairly accurately. Even the more difficult financial ones, like the stock market and interest rates, can be predicted within some range.
Starting with the economy, 2015 should be a decent year for overall growth. 2014 ended on a stronger note, which should continue into this year. Auto sales should remain strong, benefiting from lower oil prices, and real estate should perform well with low mortgage rates. The labor market should improve in 2015 with the unemployment rate continuing to decline, both nationally and in our area. This should result in average wage gains being a little bit better than the 2 percent range we have seen in recent years.
Obviously not everyone’s pay will increase with the averages, as a lot depends, if someone is working in a growing industry. In addition for those looking for a job, or making a job switch, it should be easier to find employment versus what was experienced in recent years.
Inflation should remain low in 2015 helped by lower gasoline prices. However, in our area we will tend to see less benefits of lower infla-tion versus the national average. The new cap-and-trade law went into effect at the start of this year, which will cause our gasoline prices to be even higher relative to the national figures.
In our local area we have one of the highest housing costs in the country. This results in people paying a greater percentage of their income for rent or a mortgage. With the housing mar-ket strong at the moment, rents are likely to increase more than overall inflation rate, which will tend to cancel out some of the benefits of lower gasoline prices.
Looking at financial markets, international developments will continue to play a major role. For example, as I write this column on Monday, our stock market is down sig-nificantly on news of further problems in Greece. There are many potential trouble spots in the world, so there will be days that the market has a major drop because of international news.
We had these events last year, and the market always recovered to set new highs. What the major unknown for this year is whether this pattern will continue, with stocks recovering from these periodic bouts of negative news.
With regards to interest rates, there is a strong likelihood that the Fed will eventually start to raise short-term rates. It will be gradual, so savers should not expect to see rates go much above 1 percent, at least for the duration of this year.
The direction of longer term rates is a tougher call. Seeing 10 year Treasury yields come down to close to 2 percent at the end of 2014 was a major surprise. For now, a lot depends on the direction of the U.S. dollar. If the dollar remains strong, foreign money will continue to be attracted to our markets keeping rates low, otherwise longer term yields should go higher.
With regards to oil prices, they will likely stay low for a period of time. Eventually there will be some supply disruption in the world, plus there will be less drilling activity causing prices to eventually rise.
For the investor expectations need to be tempered. While another double-digit gain in stocks is conceivable for 2015, most likely returns will be more muted over the next several years. Unfortunately, alternatives to stocks, such as bonds and money market, do not offer much in terms of future gains, but do have less risk. Therefore, I would not recommend investors make major changes, but just review their portfolios to insure they are not too aggressive for one’s level of risk.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.