It finally happened—after more than two years, QE3 is over, and the United States’ economy has flip-flopped from what it was when the third round of quantitative easing began. Gross domestic product (GDP) recently exceeded expectations, manufacturing is up, and the dollar is the strongest it has been in seven years.
Phil Flynn, senior market analyst at the Price Futures Group, calls the current situation “the inverse of the beginning of the economic crisis.” In 2007, when Ben Bernanke began a series of extraordinary interventions, the international sentiment was that the world would not be greatly affected by a U.S. recession. Other countries began raising interest rates, causing one of the biggest commodities spikes in history.
That came crashing down in 2008 once people began to realize that the problem was very real and the rest of world was more connected than they thought. Commodities plunged.
“Now we’re on the other [side] of the coin,” Flynn says. “Now, it’s the United States that is growing. The rest of the world is what’s having problems.” As the United States ends its assets-buying programs, Japan and Eurozone countries are increasing stimulus (see “Central bank divergence,” right).
In light of this, we asked analysts what market sectors they believe will be most active as 2015 approaches and all of these different monetary policies come into effect. While interest rates across the entire yield curve should be more volatile, even the pace of tightening is unclear, to which our analysts’ varying predictions for when the Federal Reserve will finally begin tightening its policy can attest.
Energies make a comeback
Crude oil has taken a pounding recently—U.S. production is skyrocketing, but a strong dollar is offsetting lower prices for producers. Saudi Arabia chose to compete on price rather than cut production.
But James Cordier, head portfolio manager at OptionSellers.com, is optimistic about this market. “We really like crude oil going into 2015,” he says, predicting that it will return to the $80 level and not go much lower than that.
Many analysts are thinking along the same lines. Jason Rotman, managing partner of Lido Isle Advisors, says, “I would not be surprised to see crude oil find balance between $80 and $90 in 2015.”
A couple of months ago that prediction would have put Rotman solidly in the bear camp, but things have changed. The number of drilling rigs in the United States is falling, and demand is sluggish at best. Yet lower prices may encourage consumption and provide gains later. According to Rotman, anything under $100 will be beneficial to the stock market: The lower the price of oil, the more money people have to spend and invest.
Flynn is looking forward to a new era for gasoline prices. “We’re going to get used to seeing gasoline prices below $3 per gallon,” he says. “That’s going to give a big boost to the stock market going into the new year.” He believes that oil will bounce off of a level no lower than $70 and hopes that this price will give a boost to both producers and consumers (see “A new game for crude,” below).
Matt Weller, senior technical analyst at FOREX.com, thinks these low prices will stay for quite some time. “Crude’s recent drop has been driven by increasing global supply, and this trend could continue into 2015,” he says. “While geopolitical risk is always unpredictable, the new regime of relatively low oil prices should hold through this year.”
Instead of further drops in price, the crude oil market will see a period of low volatility as traders consider both the global supply glut and production decisions by OPEC, according to Weller.
In other energies, Flynn is paying special attention to natural gas, which he believes to be an underrated market. “We’re going into the new year with prices lower than they were a year ago,” he says. Natural gas was one of the markets that actually outperformed in 2014, thanks to cold weather predictions and coal plant retirements. “It will catch people by surprise,” Flynn says.
A change in the metals game
Expect a new environment for metals in 2015. Weller says gold will lose its relevance as a “safe haven” as the economy picks up and people no longer express fear of a further economic downturn or a spike in inflation through gold. Weller notes that gold looks “particularly vulnerable” in 2015.
Currently, silver futures are dropping quickly as investors leave precious metals behind. Yet silver bullion coins are selling out at the U.S. Mint because of retail buyers rushing to take advantage of the lower prices. Dealers are having a hard time finding enough silver to satisfy their customers’ demands.
Cordier explains the shift away from gold: “With markets doing as well as they are, ‘safe haven’ probably won’t be as much of a buzz phrase next year.” He named silver as a hot market for 2015 and expects a rally. “We could see silver getting back to $20, and possibly north of that.”
Jason Rotman also expects silver to rise. “Not only will a ‘patient’ Fed potentially boost silver prices, but also as the global economy recovers and the United States continues its forward momentum, we might see increased demand for silver in industrial uses,” he says. He cautiously predicts that silver will approach the $20 level.
Flynn, however, is more reserved, considering the economic situation in the Eurozone and in Japan: “We’re going to see that it’ll be very difficult for gold and silver to rally without any help from growth in Europe and Asia.”