The stock market roared through 2014, rallying to record highs, but some market watchers now believe the rally is coming to an end. In 2015, investors will feel the full pain from the Federal Reserve’s end of Quantitative Easing 3 (QE3) bond-buying program. Several other major factors, including oil prices, indicate an uncertain future in 2015.
According to the Bloomberg smart money flow index, professional investors are already fleeing the stock market in droves. Overvalued after one of the longest bull sessions in history, market watchers are seeing shocks such as Federal Reserve actions and plunging oil prices as signs that the party is over.
The Telegraph listed its 10 biggest factors that could lead to a 2015 crash, most linked in one way or another to the Federal Reserve.
QE3 officially ended in October of last year, sending yields on two-year U.S. treasury notes soaring from 0.31 percent to 0.74 percent, a troubling sign in and of itself.
JJ Kinahan, chief market strategist at TD Ameritrade, explained about the treasuries to CNBC News.
“People are a bit more cautious as we head into the beginning of 2015; the 10-year and 30-year, these levels are taking everybody by surprise, after all this talk in the third week of December that we’re going to see rising rates.”
The Fed has accumulated approximately $4.5 trillion in assets through its QE3 purchasing program according to the New York Times, money that allowed the stock market to float on a new sense of safety.
Additionally, the Federal Open Market Committee (FOMC) has said that it would maintain the federal funds rate near zero percent until 2015. With economic indicators, such as unemployment, now looking relatively better now, the question is when will rates go up?
The federal reserve insists that it will “be patient” with raising the interest rates.
Still, if banks are no longer able to get free federal money, lending, including business lending, will inevitably inch forwards, hurting all sectors of the economy and further driving down the stock market.
Then there’s the law of gravity: what goes up must come down.
The U.S. stock market has maintained a growing bull market since March, 2009, the third longest rally in history.
The longest bull market lasted until October of 1929. That didn’t end well.
The second longest bull market preceded the dotcom bubble in 2000.
Unlike those bust times, this latest stock market rally seems to be based on nothing, adding to insecurities about the Fed’s ending support.
Then there’s oil.
“With oil down, everyone is trying to reassess how strong 2015 will be, I would say we’re seeing caution as investors start the year,” warned Kate Warne, investment strategist at Edward Jones.
Although many experts believe the low oil prices will be a net positive for the U.S. economy, including Federal Reserve Chair Janet Yellen, it will be hard felt in Texas and in the fracking industry.
Overall, investors may want to exercise some restraint in the stock market going into 2015.