BWFA is Bullish on America

By:  Bob Ray, MBA | Financial Advisor & Portfolio Manager

As we usher in 2015, the United States appears poised to once again be the engine that drives worldwide growth. This has not happened in over twenty years. We have had strong growth as well as recessions during this time period, but never has the world been more dependent on the US economy for growth. So, it’s time to wave the Stars and Stripes. America is back!

The past few decades have witnessed strong growth from China and the emerging markets and steady growth  from the industrialized world, including the United States. This balance has meant that the world was less dependent on the US than we witnessed in the 80’s. But today, Europe is stuck in a zero growth environment, China is struggling to maintain a growth rate half of what it was ten years ago, and the emerging market economies of Russia and Brazil are pinched by the rapid decline in oil prices at the end of the last year. The United States still has the largest economy in the world and now the rest of the world will look to the USA to solve its economic woes.

In terms of Gross Domestic Product (GDP), the USA leads the world at approximately $17 trillion per year. China is roughly half our size at $8 trillion and Japan follows at roughly $5 trillion. If we add up all of the European Union countries’ GDPs they would equal approximately $16 trillion.

The US economy is expected to continue  its dominance in 2015 led by growth in consumer spending and higher capital expenditures. The consensus of growth forecasts have led the markets to anticipate that US interest rates will rise this year and this has resulted in continued strength for the US dollar. The continued increase in jobs and the decrease in the unemployment rate will eventually lead to higher wages and increases in domestic spending. The demand for goods and services will increase US imports, thus benefiting China, Europe, and the emerging markets. Capital inflows to the US markets, including equities, are expected to continue in the new year as the United States has the most favorable growth outlook and the strongest currency.


The United States is in the middle of a perfect storm. We have the cheapest energy costs in the industrialized world, historically low interest rates, and an excess supply of labor. This has led to manufacturing  companies  returning production to the United States instead of outsourcing to developing countries. This trend is expected to continue in the new year as fiscal policies replace monetary easing as a driver of growth.

Few of us ever dreamed that the US would eventually be heading for energy independence. Alternative energy sources have been marginally successful, but the real driver of our low-cost energy has been the emergence of fracking. This technology has given us the ability to reach oil and natural gas deposits that previously we had not been able to reach, or were uneconomic to pump out of the ground. The more oil and natural gas produced from the Bakken, Marcellus, Eagle Ford, and other US basins, the more the downward pressure on worldwide energy prices. Lower energy prices not only benefit US consumers, but dramatically help US manufacturers. Energy is a key cost component in many industries. This cost advantage will help offset higher US labor costs and encourage companies to bring home manufacturing that had been based overseas. The jobs should follow the plants. However, there are still a few caveats.


We expect that the new Congress, working with the Administration, will lower corporate income taxes in 2015. The US has one of the highest corporate tax rates in the world. This has resulted  in corporations moving their operations overseas in search of a lower tax bite. Other companies with strong overseas sales have left billions of dollars overseas rather than pay up to 35% tax to bring the profits home. Lower US corporate tax rates would propel smaller US companies that now pay 35%, and allow larger companies with funds trapped overseas to bring the dollars home. This will facilitate growth in the US as well as add some marginal tax revenues that will help reduce the US budget deficit.

Lower corporate tax rates have the support of both political parties. The lack of structural reforms to the tax code  over the past few years has not allowed US companies to take advantage of the newly found cheap energy. This has not been missed by foreign companies as most foreign car manufactures now have facilities in the US. If these problems are resolved, we would expect to see billions of dollars flow home. This should lead to more manufacturing here in the US and higher paying jobs.


Over the past six months the US dollar has advanced more than 10% against   its major trading partners due to growth forecasts and favorable interest rate differentials. This is good for America and our trading partners. The strong dollar will help keep the price of energy down, as oil is priced in dollars on the world markets.  It also reduces the cost of imports, thus inflation will be kept under control. Our major trading partners will benefit as their currency depreciation will make them more competitive. As our economy grows so will our demand for foreign goods. Once again we will be the engine driving growth around the world.

However, not everyone will benefit. The losers will be the developing countries that export commodities. For example, Russia and Brazil will see their oil and minerals worth far less as the strong dollar forces commodity prices lower. India, an importer of oil, is expected to benefit marginally but will find its currency can’t keep up with the dollar. More importantly the strong dollar will coincide with rising US interest rates, which will suck liquidity from the emerging markets. As the Federal Reserve Bank reduces liquidity, the deleveraging will affect all developing countries.


Given our forecast of continued strength in our economy and the dollar, the US equity markets will remain the asset class of choice. We do expect that interest rates will be rising in 2015, and this will lead to continued market volatility. But, the only reason to raise interest rates would be in response to a much stronger US economy. US equity markets should continue to do well in this environment.