Déjà Vu: Strategists Predict Higher Rates in 2015
It’s the end of the year and you know what means: it’s prediction time. Everyone loves a good forecast, and specific targets at a future date tend to get the most attention. Predicting exactly where the markets are going to be a year from now is of course an impossible task, but that never stopped the street from trying.
Wall Street is unequivocally bullish on stocks for 2015. As Josh Brown of Ritholtz Wealth Management noted, Barron’s “couldn’t find a single bear” in their panel of top Wall Street strategists.
After six consecutive years of gains for the U.S. stock market, this bullish bent is not that surprising. These strategists know the odds (stocks are higher on a calendar year basis more than 75% of the time) and almost always predict gains in the year to come. After a streak of positive years, the perceived odds of a positive year are undoubtedly even higher. More importantly for these strategists, the career risk of predicting a down year is probably too great a risk to take.
What I find most interesting here, though, is the continued bearish outlook on bonds. At the end of 2013, the U.S. 10-year yield stood at 3.02%. Strategists on average predicted this yield would rise to 3.4% in 2014, the so-called “rising-rate environment.”
Instead, yields did the exact opposite in 2014, falling precipitously throughout the year to their current rate of 2.16%. This has been a strong tailwind for Treasury bond investors, particularly at the long end of the curve.
What are strategists expecting for 2015? A “rising-rate environment” once again, with an average year-end forecast of 3.0%. Incredibly, not one strategist believes that rates will be anywhere near the levels of today, with the lowest year-end forecast of 2.75%. The uniformity in their thinking is striking from a sentiment standpoint, particularly after a year in which yields have fallen sharply.
If these strategists are correct, there will be a substantial move higher in interest rates next year and a sharp divergence from the rest of the developed world (Japan, Germany, France, Spain, etc.) where we are witnessing record-lows in 10-year yields.
Why are they so bearish on bonds here, expecting yields to rise? I’m guessing their forecast is predicated on two beliefs: stronger growth in 2015 (see below, they’re expecting GDP growth of 3% on average) and a more hawkish Fed. If they are correct on both of these assumptions, perhaps it will lead to higher rates in 2014, but that is of course a big if.
If growth falls short of these expectations and the Fed is more dovish as a result, it will be difficult to argue for higher long-term U.S. yields given record-low yield levels in Europe and Japan.
But even if the Fed does finally raise rates in 2015, for long duration yields to rise, investors will have to be betting that such a rate hike will not impede future growth prospects. With an economy and stock market increasingly dependent on 0% rates, this may be tall order. If market participants view a rate increase as contractionary, we are likely to see a further flattening of the yield curve in 2015.
Predicting where the 10-year yield will be in such a scenario, and expecting it to move higher just because the fed funds rate is increased may not be such an easy assumption.
But don’t take my word for it. Ask Alan Greenspan about his “conundrum.”
“We wanted to control the federal funds rate, but ran into trouble because long-term rates did not, as they always had previously, respond to the rise in short-term rates.” – Alan Greenspan
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
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