I read an interesting briefing note this morning from Dominic Rossi, Global CIO for Equities at Fidelity Worldwide Investment, asking whether the US bull run will continue in 2015.
Rossi explained that investors might expect further bouts of volatility in 2015, with the prospect of interest rate rises in the US.
He believes however that the US stock market will deal with these rate rises quite comfortably, and the speed and extent of rate rises is likely to be slower and more contained that many are predicting, as price inflation is subdued and commodity prices are weak.
He is forecasting the US bull run to continue right up until the presidential elections in 2016, with robust growth prospects for the US economy allowing investors to focus on positive corporate earnings and dividend growth.
Rossi explains that the key relationship which will continue to shape US stock markets is is the combined impact of weaker commodity prices and the strengthening dollar.
Commodity price weakness is likely to persist as the oil price has fallen by 25% since July 2014, with a structural shift in supply-side dynamics to expanded US shale production.
Another factor Rossi points out is the the dollar, which has appreciated significantly against other major currencies in recent months. When the world’s reserve currency appreciates, it deflates other assets, particularly commodities such as oil that are priced in dollar terms.
Rossi explains this is the inverse of what happened over 2003-8 when a weaker dollar inflated commodities and supported emerging markets.
The prospect of rate rises in 2015, coinciding with further quantitative easing in Europe and Japan, could lift the lid on dollar appreciation, which until recently has been constrained by an environment of loose monetary policy.
In summary, Rossi explained that investors shouldn’t be unnerved by the occasional bouts of volatility in 2015, as markets factor in interest rate rises.
He thinks that, fundamentally, the positive economic and earnings growth prospects for the US economy will ensure the five-year-long US equity bull market has further to run.
While other markets can also continue to perform well, Rossi doesn’t see a fundamental change in leadership in this bull market, particularly given the prospect of a stronger dollar, which is traditionally a headwind for commodity-dependent emerging markets or those that still have significant dollar liabilities.
Do you think the US bull run will continue in 2015?
