A woman pushing a cart is reflected on an electronic board showing the graph of the recent fluctuations of the Japan's Nikkei average outside a brokerage in Tokyo December 24, 2014.YUYA SHINO/Reuters
Anyone remember what normal looks like in financial markets?
Six years after the global financial crisis peaked, we still haven't returned to normal conditions. Central banks around the world are holding interest rates at historic lows, and that's helped fuel out-sized gains from stock markets. Who wants to own a government bond when the yield is easily half what you can get from a dividend stock offering the potential for capital gains as well as reliable income? Now, as 2015 gets underway, there's speculation that we will start edging back to more normal market conditions. For some ideas on how stocks and bonds might perform, let's consult the 2015 lookahead from investment firm Edward Jones.
The Jones outlook considers what's happened in recent years and compares it to "normal" conditions and expected conditions in 2015. Here's how the outlook breaks down:
Stocks
Returns since 2012 have been nearly two times as strong as the 20-year average of 8.7 per cent. The Jones forecast for 2015 is for mid-single-digit increases based on improved earnings growth in a growing economy.
Interest rates
Jones says the 10-year average yield for 10-year government bonds has been 4.97 per cent, while recent yields have been close to 2 per cent. For 2015, the firm sees the beginning of a slow but steady rise in rates. Expect bond returns in the mid to low single digits.
Volatility
Although North American stock markets have been up and down in recent months, volatility in the past few years has been below the usual levels. On average, we've seen one 10-per-cent correction and three 5-per-cent pullbacks per year. The firm expects higher volatility levels in 2015 as a result of uneven global economic growth, geopolitical uncertainties and weak commodity markets.
The economy
The average annual growth rate over the past 50 years has been 3.1 per cent, which compares to about 2 per cent in return years. This year, Jones sees moderate by improving growth in North America, but also some headwinds on a global basis.
On stocks, Jones sees more attractive opportunities in overseas, U.S. and Canadian large-cap stocks versus small caps. The firm's top sectors are health care, technology and consumer staples. Utilities and telecom are seen as less attractive because they would underperform in a rising rate environment.
Rob Carrick