2015 Mid-Year Outlook: Some Assembly Required
Few things can dampen the excitement of seeing the delivery of a long awaited package on the porch than three words — “some assembly required.” Whether it is navigating the confusing instruction manual, sweating through the complicated assortment of parts, or the sinking feeling that you don’t have the right batteries in the closet, sometimes the hard work comes after the delivery truck has driven off. And like any complex assembly, whether it’s a 1,000-piece puzzle, a kid’s shiny new bike, or a plan to navigate tricky economic times, the amount of pieces to collect and put together can be daunting. But the assembly can certainly be made easier with a well-formulated plan, the right tools, and the LPL Research Midyear Outlook 2015: Some Assembly Required as the blueprint for success. Below are some highlights from the newly released publication from LPL Financial Research:
We continue to expect that the U.S. economy will expand at a rate of 3% or slightly higher over the remainder of 2015, once economic conditions recover from yet another harsh winter — and other transitory factors — that held back growth in the early part of 2015. This forecast matches the average growth rate over the past 50 years, and is based on contributions from consumer spending, business capital spending, and housing, which are poised to advance at historically average or better growth rates in 2015. Net exports and the government sector should trail behind.
Overseas, ongoing quantitative easing (QE) by the European Central Bank (ECB) will help to anchor the nascent economic recovery in the Eurozone, while easing already put in place from the Bank of Japan (BOJ) should secure acceleration in Japan’s economy in the second half of the year. In China, growth has slowed from the unsustainable 10–12% pace seen in the first decade of the 2000s to around 7% this year, but we continue to expect Chinese policymakers to use all the tools in their toolbox (monetary, fiscal, and regulatory) to hit the 7% growth target. For more on our thoughts on the global economy, see our international section, “Be Careful Not to Overtighten.”
We remain confident in our 5–9% total return forecast for the S&P 500 for 2015, although reaching that target will require a power boost from corporate America. Our forecast is inline with the long-term average range of a 7–9% annual gain for stocks, based on the S&P 500 Index, since WWII. Our forecast is based on expected mid-single-digit earnings per share (EPS) growth for S&P 500 companies, supported by improved global economic growth, stable profit margins, and share buybacks in 2015, with limited help from valuation expansion.
The S&P 500 Index is on track to meet that forecast by year-end, having returned 3.5% year to date through the end of May 2015. However, headwinds that emerged early in 2015 mean getting there will require fresh batteries to fuel a second half charge.
We continue to expect roughly flat bond returns for 2015, as the choppy market environment witnessed over the first half of 2015 continues.
The challenging, low-return environment confronting bond investors is likely to persist, and a slowdown in performance — even for sectors that fared well over the first half of 2015 — appears probable.
We still expect a modest rise in bond yields over the course of 2015; but an increase of 0.25% to 0.50% in the 10-year Treasury yield, the lower half of our initial forecast, appears more likely due to the persistence of low inflation. An increase of 0.75% in 10-year Treasury yields is possible, but a low probability, in our view. Disappointing first quarter economic growth and a later start to Fed rate hikes, with a slower pace of additional hikes likely, mitigates the risk of a greater rise in interest rates.
If our forecast of 3.0%+ GDP growth over the remainder of 2015 is met, the economy will enter its seventh year of expansion in June 2015, and by the end of the year would become the fourth-longest economic expansion since World War II (WWII) at 78 months. The current recovery is already longer than the average economic recovery duration of 58 months.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
For a full list of important disclosures please view the full document provided in this blog post.