Shaping a portfolio for 2015 (v): the US

a healthier economy

2015 will likely be the first normal year for the US economically for a long time.  The unemployment rate is close to full employment levels; job creation is high–and accelerating; recent signs suggest that wages are beginning to rise.

Wage gains are important for two reasons:

–higher wages imply more consumer spending, which means accelerating economic expansion, and

–the resulting increase in the price level diminishes the possibility of deflation.

alone in growth mode

The EU is, generally speaking, a less dynamic area than the US.  But it is also years behind the US in putting recession in the rear view mirror.  It is still struggling with structural problems–Greece, for example, is flaring up again.

I continue to believe that Abenomics is not going to solve Japan’s economic woes.  So pencil in no growth there.

China is attempting to transition from being an export-driven economy to a doemstic demand-oriented one.  As one would expect, it is encountering tremendous resistance from the export establishment.  This struggle will keep the Chinese economy range bound around 6%-7% GDP growth for a while.  Big numbers, yes, but no acceleration like the US is experiencing.

a lower oil price

I’ve written about this in more detail earlier in this Strategy series.  For the country as a whole, a lower oil price is a plus.

Assuming, as I do, that prices will stay around this level, effects will likely be:

–the biggest percentage change in disposable income for the less affluent,

–diminishing interest in alternate energy sources

–economic, and possible political, troubles for oil-producing countries–Russia, the Middle East and Africa.

We’re already seeing renewed interest in gas-guzzling cars and trucks in the US.  But also–a good thing, in my view–politicians are beginning to talk about raising taxes on gasoline.  This would provide funds–at least in theory–to repair decrepit roads and bridges.  By encouraging conservation, it would also lessen the long-term economic power of the oil producers.  And it would bring US policies more in line with the rest of the developed world.

rising interest rates

The good economic news opens the door for the Fed to begin to raise interest rates from the current emergency-low levels.  I’ve written about this too in more detail earlier in this Strategy series.

Normalization of rates is a long-term plus.  But rising interest rates will also tend to slow growth a bit, both by raising the cost of borrowing and by rising interest rate differentials between the US and other countries giving strength to the US$.

structural factors

The Internet continues to be an amazingly powerful force of creative destruction in the economy.  No end in sight.

Millennials have surpassed Baby Boomers as the largest segment of the population.  In addition, Millennials will be the chief beneficiaries or rising wages, while Boomers will see their incomes drop as they enter retirement.

my bottom line:  the fact that the US is coming further out of recession is a huge long-term plus, both for the economy and for US financial markets.  Purely from a stock market point of view, however, there are a lot of conflicting variable in the equation for 2015.  And that’s apart from trying to handicap what the markets have already begun to discount.  More about this when I put all the pieces together in a couple of days.

2 responses

  1. The problem with raising any taxes including the gas tax is that the federal government will use those taxes to fund entitlement programs rather than what they were intended for. Instead, they need to prioritize the funds they already receive for infrastructure projects. Wishful thinking I’m sure, but you can’t give a drug addict another fix and expect him to do the right thing.

    • Thanks for your comment. You’re right. Certainly history says that gasoline tax money earmarked for the roads often ends up funding something else. There is the consolation, though, that reduced oil consumption does reduce the country’s vulnerability to another oil shock.

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