So far 2015 has been a year loaded with volatile headlines generated around the globe and around the board table—from Greece to China to Puerto Rico to the Fed’s slippery timing for its first interest rate hike since 2006.
Despite this, measures of U.S. stock market volatility, including the CBOE Volatility Index (VIX), remain low by historical standards, flaring briefly when the heat on Greece intensified. VIX has been so low, in fact, that some observers grew worried about the fine line between calm and complacency. What’s more, leading U.S. stock indexes scored repeated record highs in 2015’s first half, even with earnings and economic strength sometimes in question.
As the second half of 2015 gets under way, our panel offers a mid-year stock playbook with their top 12 storylines of the year—the surprises, the characters that just won’t die, and the plot twists that are still playing out. It’s a list aimed at better positioning investors and traders for what’s likely to be a more volatile conclusion to the year.
In early July, Greek officials were scrambling to secure what would essentially count as the third bailout of its financial crisis after voters roundly rejected tougher austerity in a referendum. In response, global financial markets bounced between sharp losses and gains as the world debated the future of the eurozone and its shared currency. Already, the decision was made to let the eurozone’s portion of Greece’s existing EUR245 billion ($274 billion) bailout expire at the end of June. Greece failed to meet its deadline to pay 1.6 billion euros it owed to the International Monetary Fund on June 30 as well—the first time a developed country missed a payment to the IMF, according to news reports. The policy gap could end with Greece’s exit from the group of nations sharing the euro, but several top European leaders had pledged to pursue all avenues to keep today’s eurozone intact. The White House had urged the leadership to keep Greece in the eurozone; Germany had expressed its interest to walk away.
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#2—U.S. Economy: More Purr Than Roar
Standard & Poor’s affirmed a strong AA+ credit rating on the U.S., with a stable outlook, in June. Analysts there cited the pace of U.S. economic growth compared with other advanced economies. With the ratings note, S&P said it expects U.S. growth of 2.4% this year, similar to 2014, after a contraction in Q1 2015 that they chalked up mostly to temporary factors. Over the next several years, these analysts expect real U.S. GDP growth of just below 3%. Long-term potential growth is likely to be close to 2% a year, reflecting aging demographics (which contribute to labor force participation being at a 36-year low) and diminished labor productivity gains over the past decade compared with the postwar average, S&P said.
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#3—Secret Shopper: Where’s the Elusive Consumer?
Improving employment and housing numbers continue to trickle in this year. But other economic indicators, from durable goods buying (big-ticket spending on anything from cars to planes to computers) and broader retail measures reveal a lack of consumer confidence in the economic recovery. It’s a fragile environment that Federal Reserve members have noted is behind its go-slow approach (so far) to interest rate increases. Interestingly, the retail landscape continues to shift, including more online buying than ever before. Women control around 70% of household purchases, according to Boston Consulting Group. That means businesses may have to constantly rethink how they reach this big group of buyers if they want women to drive the recovery.
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#4—Global Rate About-Face
The speed of the reversal in global bond yields as deflation fears eased has surprised some market observers. Momentum investors started selling, or in some cases shorting, bonds, which, in an illiquid market, led to sharply rising yields around the globe. Europe is at the epicenter. After declining through all of 2014 and early 2015—and hitting a low of 0.08% in mid-April—the German 10-year bond shot up as high as 1% in June. Benchmark 10-year U.S. Treasury yields followed, rising from a low of 1.6% to north of 2.3% in late June.
Take action: Find out what rising rates could mean for your bond holdings. Contact a fixed income specialist.
#5—Fed Decision Time
The World Bank joined the International Monetary Fund this spring in urging the Federal Reserve to hold off on raising U.S. interest rates until next year, citing an uneven U.S. recovery and the risks to emerging markets of tightening policy any sooner. The theory is a rise in interest rates will push up the dollar even more, which may slow the U.S. economy and sideswipe emerging and developing countries. It’s been a complex dance between the Fed’s interest rate policy and its struggle to fight deflation. But now, inflation expectations (which can be as impactful as inflation itself) are as high as they’ve been since the financial crisis. Raising interest rates at this point has the potential to bring massive amounts of capital flow to the U.S from foreign safe-haven seekers, which would be difficult to control. While the U.S is probably best-positioned economically compared to everyone else, the question for the rest of 2015 could be how the Fed raises rates without crushing the rest of the world.
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#6—Dollar Muscle Weakens Multinationals
The risk of sharply higher rates driving up an already strong dollar has factored into cautious second-half earnings forecasts from executives at the firms whose global footprint feels the cramp of a strong home currency. After all, nearly half of the S&P 500's sales come from outside of the U.S. The big question that investors should ask is what firms are taking the necessary steps to offset the bite of a strong buck.
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#7—Emerging Markets: Who’s Next?
Some of 2014’s emerging-market laggards have turned into 2015’s best performers, according to data from T. Rowe Price. That’s true for Russia, to name one locale. Earnings expectations in several markets appear to have bottomed out, bringing renewed attention to places such as India and the Philippines.
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#8—Puerto Rico: Problems Closer to Home
While all eyes were on Greece, troubled Puerto Rico snuck back on the scene. Its influence on the broader U.S. municipal bond market and thus, interest rate markets generally, can’t be ignored. Late in June, the small U.S. territory announced it cannot pay its roughly $72 billion in debt. Less than 24 hours later, Gov. Alejandro Garcia Padilla proposed a plan to seek a restructuring of the island’s debt, suggesting to some observers that the island is virtually insolvent.
Take action: Read more in a long-awaited report compiled by former International Monetary Fund experts that hit in late June.
#9—China: Year of the Bear?
After more than a week of a brutal sell-off in Chinese stocks, the country’s central bank in late June took a rare easing step, cutting both its benchmark interest rates and the amount of reserves certain banks are required to hold. The action followed a some 20% haircut for China’s Shanghai Composite Index since hitting its highest level post-financial crisis as recently as June 12. The decline took root first in the startup stocks, which shed a quarter of their value since hitting record highs as a group earlier this month. Researchers with China's central bank have revised down their forecasts for the country's economic growth and consumer inflation for 2015, citing increased downward pressure on economic growth. They now forecast China's economy will expand 7%, slightly lower than a projection of 7.1% made six months ago; the forecast for this year's consumer inflation was cut to 1.4% from 2.2%.
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#10—Producer vs Consumer: U.S. Energy Role
The U.S.’s changing role as energy producer continues, challenging investors in early 2015. U.S. oil production rose to a record last year, gaining 1.6 million barrels a day, according to BP’s Statistical Review of World Energy released in early June; that pushed the U.S. to overtake Saudi Arabia as a crude producer. Gas output also climbed, putting America ahead of Russia. The data showing the U.S.’s emergence as a leading driller confirms a trend toward reduced U.S. imports, helped trigger a slump in global energy prices, and likely shifted the country’s foreign policy priorities. But the drop in prices brings its own complications. Just ask anyone in the energy industry who lost their job. Both gas and oil prices are down about 40% in the past year, cutting the incentive to keep drilling, some observers might argue. Energy companies have shut down more than half of all their oil rigs and cut back on the number of gas rigs to their lowest level in the 28-year history of rig counts from Baker Hughes. A flurry of recent forecasts from government and private-sector experts suggest monthly gas production will flatten and possibly even begin to decline in 2015, according to the BP report. In other words, this story is far from over.
Take action: Increased scrutiny of oil numbers, including rig count, accounted for increased options activity. Read our article.
#11—The Buyback Myth
Investors were challenged (and likely will be moving forward) to determine how much record-setting share buybacks boosted earnings per share (EPS). Buybacks can make a company’s EPS appear better because the denominator of the calculation is getting smaller (weighted average outstanding shares). It’s a double-edged sword because the buyback pretties EPS temporarily, but if earnings go negative or fall dramatically, the effect is magnified because of fewer shares outstanding. Ideally, buybacks occur when valuations are low, i.e., the company gets a “good deal” by buying back stock at a depressed level. But depending on what measure you look at, companies are buying back stock at high valuations.
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#12—Corporate Mixer: Mergers and Spinoffs and Reorgs
Halfway through the year, about $2.15 trillion in merger and acquisition deals or offers have been announced globally, according to Dealogic. That puts 2015 on pace to challenge 2007, the best year on record, when companies inked deals worth $4.3 trillion. In many cases, companies are concerned that if they don’t expand through acquisitions, they too will become takeover prey. Consolidation in cable, content, and health care was notable. Companies did other types of financial reengineering so far this year, too, including spinoffs (General Electric set free its financial arm, for instance) and reorganizations.
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—Contributors: Chris Alderson, Head of International Equity, T. Rowe Price; JJ Kinahan, Chief Strategist, TD Ameritrade; James Marple, Senior Economist, TD Bank; Patrick Smith, Program Manager, Trader Marketing, TD Ameritrade; John Bell, Director, Guidance Platform &Tools, TD Ameritrade; Devin Ekberg, Content Manager, Investools®; Melissa Witbeck, CFP®, Investment Consultant, TD Ameritrade.