The growth of the US economy largely continues to strengthen and I believe the stock market will in all likelihood end the year higher than where it started. I think small cap stocks will slightly outperform large cap stocks, and US markets will outperform most established and emerging international markets. These beliefs are based on the performances of the US and foreign economies over the past quarter.
The Impact of Low Oil Prices
Low oil prices are not good for everyone, but they are more good than bad for investors who hold general, diversified funds such as the TSP S and C Funds. In general, low oil prices will be good for the US economy, freeing consumers to spend their gas savings on other things which will lead to growth in other sectors. It will also be good for Europe and Japan, although to a lesser extent because the weakening of the Euro and Yen means gas in those places is still nearly as expensive for them now as it was six months ago before the oil crash.
Stock Market Volatility
I don’t really see a basis for the opinions of the financial media pundits who say the market will be more volatile in 2015 than normal, but there will certainly be volatility along the way as the price of oil and other external factors cause short term swings. I don’t see ISIS or Russia or any of the other current “crises” having more than a temporary impact at any point in the next 12 months. As at the beginning of every year, I will confidently predict we will see four or five 5% corrections, and probably a 10% correction at some point (because that happens pretty much every year). With history as a guide, I am convinced the timing of those corrections isn’t predictable, and that the market will recover and move higher in each case within a matter of weeks.
The China Risk
The wild card out there, and the greatest threat I see to global stock markets including our own, is China. At some point in the next few years, China is likely going to undergo a financial crisis which will make the 2008/2009 US meltdown look like a relative blip. China’s development has been funded by very low interest, cheap loans. These loans were never repaid though; instead they were simply rolled over into new loans again and again. The money doesn’t exist to pay these loans off, and with interest rates rising and tighter lending requirements in place it will become increasingly difficult to roll them over.
As a result, the Chinese financial system is in a precarious position. The Chinese certainly realize the predicament they are in and they are trying to create a way for these loans to transition to a sustainable model, but I don’t believe it will be possible without a severe restructuring of their financial system with companies bankrupted, banks failing, and a collapse of the Chinese real estate market. When this takes place, it will send shock waves through markets throughout the world, and it will likely more damaging to the Thrift Savings Plan stock funds than the European debt crisis in 2011. When and if this occurs, I will certainly be scrambling for the safety of either the TSP G or F Fund.
Thrift Savings Plan Fund Allocation
At this point, I expect I will remain 100% invested in the TSP S Fund for at least the first quarter of the year. At some point in 2015 I believe it is likely I will move to a split with the TSP C fund as we move further into the grey area between business cycle phases. That may come sooner than later as the dollar continues to strengthen against virtually every other currency, which historically has favored large caps over small caps.
2015 is also a year in which the TSP I Fund may see a relatively small allocation from me at some point (probably 15-20% at the most) depending on how things play out in Europe and Japan. The European Central Bank (ECB) will begin its form of Quantitative Easing shortly in an effort to prevent deflation in the Eurozone by buying over a trillion Euros worth of bonds over the next few years. The form this QE is taking will drive the value of the Euro down, which will make it easier for Europe to export goods. I don’t believe the European economy will really make a full recovery until Germany gives up its austerity demands and debts are restructured for the basket cases like Greece, but even just tipping growth back in the right direction could result in a strong move in the European markets. They aren’t moving in the right direction yet; it was announced just today that Germany tipped into deflation.
Japan has an easier time of managing its solo economy in contrast to the Europe with its 19 separate and very different economies. But Japan’s recovery has stalled over the last year and it remains to be seen whether Abe can restart it.
In my next post I will talk about non-TSP investing in 2015 and how I am approaching the various opportunities which the market appears to be presenting me over the next few months. Hopefully I will get that out in the next few days.
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