1. society
2. work
3. unemployment

2015 OUTLOOK
In a year when economic
growth on a global level was
mixed, both the U.S. economy
and stock market proved to
be bright spots during 2014.
The United States saw
advancing economic growth
and an improved job market.
This environment seemed
to create a sweet spot for
domestic investors—sufficient
growth to support a continued
bull market in stocks and low
inflation to create a favorable
setting for bonds.
• The U.S. economy gained enough traction
in 2014 to allow the Federal Reserve (Fed) to
finally scale back its efforts to bolster economic
growth. Late in the year, the Fed ended its most
recent quantitative easing strategies, convinced
that the economic expansion could build on its
own strength. Consumers continue to be the
driving force. While an improved jobs market
contributed to growth in consumption, so did a
significant drop in energy prices that stemmed
from a glut in oil supplies.
• A variety of challenges confronting nations
around the globe are a concern. China’s fastgrowing economy faces modest headwinds
as it implements structural reforms. Japan’s
economy suffered a modest recession in
2014 in the process of trying to implement
tax increases to reduce its burdensome
government debt. The new tax policy will
likely hamper growth prospects for Japan in
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2015 as well. Europe is still struggling to find
solid economic footing. The odds of another
recession in Europe are rising, particularly as its
two largest economies, Germany and France,
are slowing.
• Prospects for equity investors in 2015 will be
largely tied to the fortunes of the economy.
Corporate earnings have continued to improve,
paving the way for higher stock prices. If
earnings remain positive, the bull market in
stocks may continue on course. Bond markets,
after a surprisingly strong 2014, may be in
for more challenges because bond yields
are likely to begin rising again, but perhaps
only modestly. In our view, real estate and
commodity markets may generate mixed
results throughout the year since these sectors
are impacted by a variety of factors.
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GLOBAL ECONOMIC VIEWS
• We believe U.S. growth seems poised
• Inflation pressures will continue to slow
to cruise through 2015 around
across emerging market economies,
2.5 percent to 3 percent, if there
meaning 2015 is likely to see little
continues to be solid consumer
uptick in growth. Commodity-producing
spending, no fiscal drag and some lift
economies will continue to struggle with
from business investment. Housing
lower raw material prices. Commoditycontinues to recover from the financial
consuming economies will see some
crisis, but is not yet strong enough to
lift from lower prices, but relatively
drive investment growth. Export growth is
constrained monetary policy to combat
a risk to our forecast, with weaker growth
inflation implies that relatively slow growth
outside the United States.
may remain the order for the year.
• Deleveraging for Europe and Japan may
continue to constrain growth, with Europe
likely slipping into recession in 2015, but
significant monetary accommodation
supporting modest levels of growth in
Japan. Both the European Central Bank
and Bank of Japan will be required to
continue monetary accommodation to
support economic activity.
Robert L. Haworth, CFA
Senior Investment Strategist
“This is a year that begins with many
parts of the world experiencing economic
challenges,” says Rob Haworth, Senior
Investment Strategist. “Europe is
struggling, Japan continues to try to put
long-term reforms in place and China is
focused on implementing much-needed
structural changes. Emerging markets
are a bifurcated story, with commodity
producers likely to suffer, while
consuming countries fare better.” Rob
anticipates that all of these factors are likely
to limit growth on a global scale in 2015.
By contrast, the U.S. economy picked up
momentum through 2014. “We expect
gross domestic product (GDP) growth in the
2.5 percent to 3 percent range for 2015,”
says Rob. “A strong, stable consumer is one
key to continued growth. Another is that
the federal government is no longer cutting
spending. The primary concern for the
domestic economy,” says Rob, “is that the
housing market remains a question mark. It
is not recovering as fast as we’d hoped.”
[2]
Please refer to important disclosures on page 8.
EQUITY MARKET VIEWS
“U.S. equities seem poised to continue
• We expect equities to trend higher in 2015,
albeit at a moderate pace.
grinding higher in 2015,” according
to Terry Sandven, Chief Equity
Strategist. “An environment of rising
earnings, persistent low interest
rates, contained inflation and few
compelling alternatives to stocks
seem supportive of a positive
environment for equity markets.”
At the same time, Terry anticipates
a more volatile market environment.
“Our bias remains largely with cyclical
sectors and companies that tend to
perform well in an environment of slow
global growth,” says Terry. “We favor
stocks of companies that offer investors
both dividend income and price
appreciation potential.” Terry says one
of the major concerns is the risk created
by slowing global growth. “If that trend
continues, it could create a headwind
for earnings of U.S. multinational
companies and potentially dampen
prospects for equities.”
[3]
Please refer to important disclosures on page 8.
Terry D. Sandven Chief Equity Strategist
– In the United States, equities are
entering 2015 near all-time highs.
The current bull market began in
2009 following the financial crisis,
with equities at that time being
propelled higher by Fed-driven
liquidity and price-earnings (P/E)
multiple expansion. With the Fed
winding down its stimulus programs
and market multiples being modestly
above historical levels, earnings have
become the primary driver of higher
equity prices. For 2015, we estimate
earnings growth for the S&P 500 of
approximately 8 percent, with prices
appreciating in similar fashion. Our
current 2015 price target for the S&P
500 is 2,240 based on a P/E ratio of
17.5 times our 2015 earnings estimate
of $128.
– Macro, fundamental and political
environments seem supportive of
higher U.S. equity prices in 2015.
Favorable market fundamentals of
rising earnings, low interest rates,
restrained inflation, reasonable
valuations and less-compelling
alternatives continue to push equity
prices higher. And, following the
2014 midterm elections, the political
landscape has shifted toward
bipartisan governance, implying
possible increased political wrangling,
but not necessarily budget battles,
which will have a meaningful negative
impact on economic growth.
• Among international equities, the outlook
for 2015 is somewhat less clear and
perhaps less sanguine. The tepid pace of
economic growth in developed markets
such as Europe and Japan, and slowing
in the rate of growth among emerging
markets such as China, suggest that the
performance of the broad international
markets is likely to continue to lag in 2015,
at least during the first half of the year. This
may also suggest that U.S. multinational
companies are unlikely to get a significant
boost to earnings from their offshore
operations until the global economic
climate improves.
FIXED INCOME MARKET VIEWS
• We believe primary drivers of monetary policy • We expect interest rates to continue to
going forward will be inflation and wage
rise gradually as the domestic economy
growth. We expect that the earliest the Fed
and labor markets continue to improve. As
will begin to lift the fed funds rate (meaning
we move closer to the eventual increase in
when rates may begin to increase) is June
the policy rate, the yield curve may flatten
2015, with the risks skewed to a September
further. An increasing fed funds rate is
liftoff. Although we believe the trajectory of
likely to drive short yields up. Meanwhile,
improvement in the labor markets will validate
global interest in the long end of the
an increase in the policy rate next year, we do
curve may remain high given the safety
not see that occurring without the additional
and attractive yield offered by the U.S.
participation of inflation and wage growth.
Treasury market versus other developed
markets, which is likely to keep a lid on upward
• Our view on inflation is that it will struggle to
movement in the long end of the curve.
approach levels that justify a policy rate shift.
We would expect the gradual improvement
• In our view, high-yield fixed income bonds
in wage growth and inflation to continue in
will continue to outperform investment-grade
2015, reaching levels supporting a change in
options. We believe new issuance in high
the Fed stance by midyear.
yield may dip in 2015 because there are few
maturities until 2016 and 2017.
• The pace of policy normalization may be
slower than the Fed’s current summary
• We believe dollar-denominated emerging
of economic projections, because we
debt may also be well-positioned for
believe global growth and inflation concerns
outperformance in 2015. Currency reserves
abroad will likely be headwinds to the
and credit quality of the sector has been
domestic economy.
gradually improving. In addition, current
spread levels remain appealing relative to
U.S. debt sectors.
“The downward trend of interest
rates and the fact that rates
stayed low were both surprising
developments in 2014,” says
Jennifer Vail, Head of Fixed Income
Research “A lot of negative
geopolitical risk was priced into the
market in the past year. Some of
those concerns will carry over into
2015.” A big factor that could affect
Jennifer L. Vail Head of Fixed
Income Research
bond markets, according to Jennifer,
is the direction of inflation. “If we don’t
see significant wage growth, there may
not be much impetus for rates to move
up quickly. The Fed is likely to raise rates
at a very measured pace in that kind of
environment,” she says.
Looking around the globe, Jennifer
sees little chance of a dramatic change
in current rate trends. “We mainly
see challenges abroad. Yields are at
record lows and most currencies are
weak compared to the dollar. This may
limit attractive opportunities outside
of Great Britain and select emerging
market economies that issue dollardenominated bonds.”
[4]
Please refer to important disclosures on page 8.
REAL ESTATE MARKET VIEWS
“The level of recovery in the
housing market was disappointing
in 2014,” according to Ed Cowling,
Director of Specialty Assets. “The
rise in mortgage rates at the end
of 2013 and the very long winter
that extended well into 2014 took
a lot of steam out of the market. It
never warmed up after that,” says
Ed. “While the fundamentals of the
job market are solid, tepid wage
Edgar W. Cowling, Jr., CCIM
growth has limited activity
Director of
for homebuyers.” The apartment
Specialty Assets
market is a different story, because many
potential homebuyers have demonstrated
a preference for renting. “Demand is high
and there is a fair amount of building in
the multifamily market,” says Ed.
The commercial market looks to
be in a stronger position for 2015.
“Manufacturing is rebounding,
homebuilding is firming and economic
growth beyond the coastal markets
appears to be favorable,” says Ed.
“As the economy continues to grow,
we should see further strength in the
commercial real estate market.”
[5]
Please refer to important disclosures on page 8.
• The housing recovery is likely to continue
but at a modest pace. Increases in prices
have retreated from previous double-digit
year-over-year rates and the expectation
is for single-digit growth in 2015. Rising
mortgage rates will serve as a headwind but
may be offset by employment growth, low
inflation and basic economic improvements.
– Permits and starts of new homes will
continue on an upward trend, but still fall
significantly below the levels experienced
in the years prior to the recession.
– We expect existing home sales to
continue the advancing trend that
began during the second half of 2014,
with more stabilized pricing in general.
– Substantial student loan debt overhang
and concerns about employment and
the economy may keep the number of
transactions by first-time homebuyers
below historical averages.
– Rental growth in some markets may
taper somewhat as supply catches
up to demand, but we do not expect
overbuilt conditions.
• Based upon continued improvement in the
economy and underlying fundamentals of
U. S. commercial real estate, we believe
this asset class should move through
the recovery cycle, with gains in both the
number of transactions and in prices.
– Investors will look to an improving
economy and property fundamentals,
such as leasing and operating efficiency,
to support valuations and transactions.
– Investments with an opportunity to
increase occupancy, raise rents or
otherwise improve the financial
bottom line are considered to be the
best prospects. The shift from primary
to secondary markets is expected
to continue.
– Demand for downtown office and
housing should continue to draw
occupants and investor attention.
• As the eurozone economic outlook faltered
in late 2014, there was a corresponding
downturn in the public real estate market.
Re-emergence may be sensitive to
economic corrections.
COMMODITIES MARKET VIEWS
• The broad commodity complex is
likely to remain under pressure in
2015, driven by a stronger U.S. dollar,
weak global economic growth and the
overhang from relatively high inventories
across the complex. Prices could see
gains based on weather- or conflictrelated supply shocks, or if global growth
starts to improve.
• Relatively weak global growth and strong
oil production will likely pressure prices at
the beginning of 2015. As we transition
into spring, demand should improve and
producers will likely adjust output based
on lower prices, stabilizing the market
and leading to a modest lift in prices for
the full year 2015.
• Looming Federal Reserve interest rate
increases in the second half of 2015 and
a stronger U.S. dollar will keep pressure
on gold prices throughout the year. The
gold market could see rallies if demand
improves for physical gold, but weaker
growth in much of the world may temper
such prospects.
Robert L. Haworth, CFA
Senior Investment Strategist
“A key question with the
commodities market is whether
demand will rise as prices continue
to decline,” says Rob Haworth,
Senior Investment Strategist. One
of the biggest stories in 2014 was
the dramatic drop in oil prices. “The
falloff in demand combined with
plentiful supply created this trend,
and that isn’t likely to change, at
least in the first part of 2015. Unless
we see faster economic growth in
Europe, China and India, we won’t see
a situation where demand outstrips
supply in the oil market.” Similarly, says
Rob, gold has been in a bear market
for some time. “This trend is likely to
continue as physical demand for gold
remains muted.”
The market will turn at some point,
according to Rob. “We may see prices
become more attractive to investors,
and that could begin a turnaround in the
market. I would still encourage investors
to build diversification into portfolios,
with a modest position in commodities
when appropriate.”
[6]
Please refer to important disclosures on page 8.
POTENTIAL 2015 FORECAST
Our forecasts are based on what we believe is the best information available
and represent what we see as the most likely scenarios to develop as we go
through 2015. Of course, there are always surprises—circumstances that can
send the investment markets in unpredictable directions. We think it is helpful
to consider how alternative scenarios may play out if events should move in
an unpredictable way. Outlined are selected situations that could occur and
how they might impact the investment environment.
Eurozone problems become more significant
U.S. strength ignites an inflation surprise
The United States catches a cold from weaker global growth
If economic growth and wage growth in the United States show fasterthan-expected improvement, it could rekindle inflation threats, an issue the
domestic economy has rarely faced in the past two decades. If this occurs,
the Federal Reserve may be forced to tighten monetary policy and raise
short-term interest rates more quickly than expected. That could result in
challenges for both the stock and bond markets and also result in higher
mortgage rates that could affect housing market activity.
Although the U.S. economy seems to be on solid ground going into 2015,
it is not fully decoupled from the world economy. If global issues become
The potential for a financial crisis in China
China’s continued efforts to restructure its economy could lead to
disappointing growth in what has been one of the fastest-growing economies
in the world. If policy mistakes occur because of the nation’s government
trying to reform its shadow banking system, it could lead to a financial crisis
that would potentially have an impact in other parts of the global economy.
[7]
SURPRISES
Please refer to important disclosures on page 8.
Europe continues to contend with the challenges of being an economic union
where countries maintain control over their own fiscal policies. Restrictions
make it difficult for central bankers to execute a quantitative easing
program similar to what occurred in the United States. Even the strongest
economies—France and Germany—have encountered challenges, and if they
face a more significant downturn, the effects could be felt on a global scale.
more significant as the year progresses, it could slow U.S. economic growth,
leading to weaker domestic demand and raising deflationary pressures.
The Federal Reserve, already holding short-term interest rates at near zero
percent, has few options available to revive economic growth. Bond yields
would remain low, the housing market could weaken and stocks could lose
ground as corporate earnings are negatively impacted by reduced demand.
2015 OUTLOOK
If you have questions regarding this information or wish to receive
definitions of any of the terms used in this commentary, please
contact your Wealth Management Advisor or Portfolio Manager.
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These views are as of December 2014. This information represents the opinion of U.S. Bank Wealth
Management and is not intended to be a forecast of future events or guarantee of future results. It is not
intended to provide specific advice or to be construed as an offering of securities or recommendation to
invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of
any particular investor. Not a representation or solicitation or an offer to sell/buy any securities. Investors
should consult with their investment professional for advice and information concerning their particular
situation. The factual information provided has been obtained from sources believed to be reliable, but is
not guaranteed as to accuracy or completeness. These views are subject to change at any time based upon
market or other conditions and are current as of the date indicated on these materials. Any organizations
mentioned in this publication are not affiliates of U.S. Bank.
Past performance is no guarantee of future results. All performance data, while deemed obtained from
reliable sources, are not guaranteed for accuracy. Indexes mentioned are unmanaged and are not available
for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded
stocks that are considered to represent the performance of the U.S. stock market in general.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the
construction of portfolios and how investments should be allocated to specific asset classes based on client
goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.
Equity securities are subject to stock market fluctuations that occur in response to economic and business
developments. The value of large-cap stocks will rise and fall in response to the activities of the company
that issued them, general market conditions, and/or economic conditions. Stocks of small-capitalization
companies involve substantial risk. These stocks historically have experienced greater price volatility
[8]
than stocks of larger companies and may be expected to do so in the future. International investing
involves special risks, including foreign taxation, currency risks, risks associated with possible difference in
financial standards and other risks associated with future political and economic developments. Investing
in emerging markets may involve greater risks than investing in more developed countries. In addition,
concentration of investments in a single region may result in greater volatility. Investing in fixed income
securities are subject to various risks, including changes in interest rates, credit quality, market valuations,
liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in
debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term
debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal
and interest than higher-rated securities. Investments in high-yield bonds offer the potential for high
current income and attractive total return, but involve certain risks. Changes in economic conditions or other
circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The
municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political
changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause
the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to
the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with an
investment in commodities, including market price fluctuations, regulatory changes, interest rate changes,
credit risk, economic changes, and the impact of adverse political or financial factors. Investments in real
estate securities can be subject to fluctuations in the value of the underlying properties, the effect of
economic conditions on real estate values, changes in interest rates, and risks related to renting properties
(such as rental defaults).
© 2014 U.S. Bank N.A. (12/14)
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