With American consumer confidence continuing to grow, nationwide unemployment below 5 percent and interest rates untouched since June 2006, an official with U.S. Trust, Bank of America Private Wealth Management struck a positive note when he opened last week's CREW San Diego 2015 Economic Trends Forecast.
Joseph Quinlan, that company's managing director and chief market strategist, said he's confident the positive trend will continue in the near-term (through mid-year), but warned that the long-term outlook is still questionable as the U.S. dollar continues to strengthen and the rest of the world remains in "trouble."
Quinlan began by explaining that in 2015, U.S. companies will increase hiring and salaries. In addition, businesses are borrowing again from banks for expansion. This trend began in fourth quarter 2014, during which that time one half of the lending for the entire year occurred.
As a result of company growth and a stronger U.S. economic outlook, consumers are more confident. Given that American consumers are responsible for driving 70 percent of the U. S. gross national product, this indicator is extremely important.
The most impactful economic trend for households across America will be the continued decrease in oil prices.
Quinlan projects that "oil prices are going to become so cheap that it will result in consumers using more, which will create a new natural equilibrium," an intersection point where supply equals demand for oil in the United States.
Consumers should also feel content about interest rates in the months ahead. Despite chair of the U.S. Federal Reserve, Janet Yellen's ongoing appeal to raise rates, Quinlan expects interest rates to stay the same in the near term. Yellen is at ease for now, knowing that when the need arises "she'll be able to use rates as ammunition to stimulate the economy."
Quinlan suggested to the audience that they enjoy the current economic conditions, but noted three specific factors that could affect the U.S. economy in 2015.
1. U.S. dollar. The biggest threat to the U.S. economy is the increasing value of the U.S. dollar. As the dollar increases, exports will decline. Additionally, Europe and China will see greater deflation, and U.S. citizens with international earnings will see a decrease in salary as it is exchanged for U.S. currency. If the value of the dollar continues to increase at its current rate, during mid-year, small- to medium-sized business owners may slow hiring and hold cash for better times. If this happens, Yellen will likely use that ammunition to raise interest rates.
2. Problems in other countries. "While the rest of the world is in trouble, the U.S. economy is on top," Quinlan said. "I'm not sure where the rest of the world will end up." For example, Quinlan expects GDP in China to fall to 5 percent from its current growth rate of 10 percent. When this happens, the U.S. will lead the world, as it will contribute more to global growth than China for the first time in more than nine years. However, less demand for commodities in China will affect the world's commodities market, including the U.S. The private sector will be the new driver in China. Adding to that, "Europe is flat on its back," Quinlan said. The European Central Bank bond stimulus program could be good but "it's four years a little too late." The Middle East is a toss-up. Overall, these problems result in good news for the U.S. market. Quinlan assured the audience, "Global capital is going to pour into U.S. markets in 2015."
3. Washington. Policy decisions on immigration, trade, corporate taxes, energy and entitlements can move the economy in 2015. "Washington just needs to show up and work," Quinlan said, while also noting that some policies like corporate taxation will go unchanged until after the 2016 presidential election.
Regarding the impact upon Wall Street, Quinlan suggested that January's decrease in the stock market is "just a flushing out – we're just eight trading days into the year."
Attractive places to invest will include energy, especially mid-year when cyclical industries such as finance and industrial will also be attractive. If the dollar continues to strengthen, small and mid-cap stocks should increase while large companies (those with a large international presence) will decrease. Water continues to be Quinlan's favorite commodity.
Quinlan also addressed the hot topic of cyber security, which he characterized as "a huge growth area for all the wrong reasons" in 2015. Technology stocks focused on cyber security will do well.
Using his own company as an example, Quinlan said that Bank of America spends $500 million a year on cyber security, and said that he worries about lower-end banks and retailers that do not have the funds to invest so heavily in cyber security.
Quinlan's presentation marked the seventh year he has served as the keynote speaker for CREW San Diego's annual Economic Trends Forecast.