From steadily declining oil prices to possible interest rate hikes, the market faces a number of headwinds.
Despite some tumultuous twists and turns, the U.S. stock market made big gains in 2014. But the new year has got off to a rough start with a market-wide sell-off.
In 2014, the Dow Jones Industrial Average gained 7.5% as it crossed both the 17,000-point and 18,000-point marks for the first time ever. The S&P 500 posted 53 record highs as it rose 12% on the year while the tech-heavy Nasdaq composite jumped more than 13% to its highest levels since the dot-com bubble burst in 2000.
But this year, the Dow has already lost more than 2.5%, and it is more than 700 points behind its record levels of just weeks ago. Both the S&P 500 and the Nasdaq have also dropped by roughly 3% during that time because of concerns about the European economy and falling oil prices.
Despite 2014’s record levels, this year’s slow start has some market analysts declaring an end to the bull market and predicting that Wall Street’s bear is emerging from hibernation. Here are some reasons why 2015 might be a disappointing year for the stock market:
Stocks are far from cheap
One of the best arguments for why 2015 will be bad for the market is that stocks are really expensive. These days, the preferred measure is the Shiller P/E, which is named after the Nobel Prize winning economist Robert Shiller and compares stock prices to the past decade of corporate earnings. By that measure, the market is at 26, well above its 130-year average of 16, and close to where the market has cracked in the past. In mid-2007, the Shiller P/E topped out at 27.5. Of course, the Shiller P/E hit 42 in early 2000. So it’s been higher, but not often.
The Fed's interest rate hike is coming
The Federal Reserve has been keeping interest rates artificially low for more than seven years to help stimulate the economy. In 2014, several positive signs like a declining unemployment rate and rising consumer confidence lifted investors’ confidence and paved the way for the government to pull back on its economic stimulus program. In October, the Fed said it would cut off its bond-buying program, and investors are now awaiting an interest rate hike.
Recently, Fed chairwoman Janet Yellen said that the central bank will likely be patient about raising rates. Other Fed officials echoed the need for a slow strategy by suggesting that the eventual hike should be gradual. Regardless, investors have been dreading the hike for some time now and any show of hawkishness from the Fed in 2015 could weigh heavily on the stock market.
Big trouble in Russia
After a year of escalating violence in Ukraine and a host of economic sanctions by Western powers, Russia started 2015 on the brink of economic catastrophe. The country’s ruble lost more than 40% in value against the U.S. dollar in 2014 and that decline has continued in the current year.
Fortune has speculated that Russia’s struggles could lead to internal civil unrest and instability along with an even greater impact on the global market.
Obviously, that would be bad news for any Western companies with interests in Russia. That includes any number of financial institutions as well as energy companies such as Chevron CVX and ExxonMobil XOM . It also could touch U.S. conglomerates like PepsiCo PEP , which paid $5 billion for Russian dairy and juice manufacturer Wimm-Bill-Dann Foods five years ago.
Europe is still struggling
As the situation in Russia and continued stagnation in Europe illustrates, economic struggles overseas can affect the U.S. and global markets. Europe’s sputtering economy has led to high unemployment and opened the door to the risk of deflation. Recently, the scheduling of presidential elections in Greece have sparked concerns that the country may leave the Eurozone and helped to push the euro to its lowest level against the dollar in nine years.
The European Central Bank has promised to help lift the region’s economy with measures like a bond-buying program similar to the one used in the United States. However, European leaders disagree about the best way to stimulate the economy, and the possible loss of Greece would likely provide another blow that could send European markets sinking further.
China is a global growth bummer
China has been a major growth engine for the global economy. That engine may now be stalled. China’s government funded a building boom in the late 2000s to avoid that global recession. And that debt-fuel growth is now coming undone.
A few years ago, China’s GDP was rising 10% a year. The Conference Board, a business research group, recently predicted that growth would soon slow to 3.9%. Less demand from China has already dragged down the economies of Latin America, Australia and Germany. America will eventually feel the pain as well.
There's just way too much oil
Last year’s steady decline in oil prices has continued into 2015. Oversupply from the U.S. shale boom and declining consumption in Asia and Europe has helped to cut the price for a barrel of crude oil in half over the final six months of last year.
As a result, the price of a barrel of crude recently fell below $50, hitting 5 and 1/2-year lows and sowing pain in the energy industry. Falling prices have also depressed the stock market. Chevron’s shares have lost nearly $13% of their value over the past six months while ExxonMobil’s have tumbled 17% – erasing billions of dollars in market value.