by Jiang Hanlu, Liu Fan
NEW YORK, Dec. 19 (Xinhua) -- After a record-setting stellar run last year, Wall Street weathered a number of headwinds in 2014 and is poised to close out the year with gains better than many analysts initially anticipated.
With the new year right around the corner, analysts expected the bull market to continue in 2015, but volatility could rise as the Federal Reserve begins hiking rates.
MARKET RESILIENCE BRINGS BETTER GAINS
At the beginning of this year, analysts were cautiously optimistic toward U.S. stocks after benchmark indices logged their best annual gains in more than a decade in 2013.
But by the close of trading on Dec. 19, the year-to-date gains on the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index have reached 7.4 percent, 12.0 percent and 14.1 percent, respectively.
2014 is very likely to be another profitable year for investors, but just not as lucrative as last year when the three indices surged incredibly by 26.5 percent, 29.6 percent and 38.3 percent, respectively.
Even so, traders said this year's gains turned out better than they anticipated, as the U.S. stock market displayed resilience against various headwinds.
"Domestic market has been pretty resilient. I've been quite encouraged how bullish things have been," Mark Newton, chief technical analyst and partner at Greywolf Execution Partners Inc., told Xinhua.
"I was very skeptical that it will be able to continue this on. I thought we could have a larger pull back, but it just hasn't played out," Newton added.
U.S. stocks experienced many challenges this year, including the first-quarter economic contraction due to inclement weather, geopolitical crisis in Ukraine and the Middle East, global growth worries, the Fed ending of its quantitative easing (QE) stimulus program, and falling of oil prices and the Russian ruble of late.
After the end of the QE in late October, "I thought the market was going to have a tough time continuing to go up. That hasn't been the case," Gregory J. Keating, managing director of James E. Coffey Securities Inc., said.
"The strategy to 'buy the dips' has been very profitable" throughout this year, said Keating, adding that "any type of negativity towards market... has been followed up by buying and basically across the board feeling that central banks have the back of the markets around the world, whether it's the ECB, or the Fed here."
SANTA RALLY CAME EARLY ON DOVISH FED
U.S. stocks spiked in the past two days, recovering from a mild pull back caused by falling oil prices, as investors cheered the U.S. central bank's pledge to be "patient" in beginning to normalize the stance of monetary policy after its final two-day policy meeting of this year.
The Fed-fueled year-end rally brought the Dow and the S&P 500 within striking distance of their record highs set on Dec. 5.
Moreover, the bullish trends gave investors hope that Wall Street is likely to see a "Santa Claus rally" again this year, which often occurs between Christmas and New Year's Day.
Traders said the "Santa Clause rally" has already started with the massive gains this week and were optimistic that the market can probably push even higher.
"Seasonally, we are in a very bullish time for equities, between now and next spring. I think unless the market turns down and gives us an excuse not to trust it, then we have to stick with the trends and I think we can still push higher into early next year," Newton said.
Echoing his view, Keating said, "December is the best performing of a year... Unless something major happens in the macro theme, I think in the end of the year, we'll continue to trade higher."
BULL MARKET TO SLOW IN 2015
Looking into 2015, market analysts expected the U.S. bull market to continue to be helped by the improving U.S. economy and labor market, and accommodative policy of global central banks.
But analysts said the bull market will slow next year and could face more volatility in an environment where the Fed is widely expected to raise the federal funds rate around the middle of next year.
"While we believe the era of excess returns and excessively low volatility is in the past, the secular bull market in stocks should continue," Bank of America Merrill Lynch said in a report on the 2015 outlook released early December.
The S&P 500 is expected to rise to 2,200 by the end of 2015, a price return of approximately 6 percent, according to Savita Subramanian, head of U.S. Equity and Quantitative Strategy at Bank of America Merrill Lynch.
Newton said the factors that are going to be very important for the U.S. equity market in 2015 include worldwide growth and disinflationary concerns.
"Near term, I think the market is still in pretty good shape," Newton noted. "Between the second and the third quarter, we'll see evidence of real market weakness."
"It's not all that healthy even though the market continues to rally," as the market looks quite extended with only a quarter of the stocks making new highs, he said.
Overall, Newton forecast that the U.S. stock market will be flat or even down 5 percent in 2015.
He cautioned that the tremendous outperformance in defensive sectors this year is typically a warning sign that things are not as good as they seem.
Keating said it's going to be harder for the market to act like it has in the last two years. "I think you really are going to have to deal with a rise in interest rate and how that's going to affect the market, and the liquidity."
The biggest catalyst of the equity market next year is whether the U.S. economy is able to grow at 3 or 4 percent, in order to warrant an increase in interest rate and get the economy back to where it should be after a long six-year period since the financial crisis, he noted.
Last but not least, analysts generally agreed that the market should see higher volatility in 2015.
"I would expect the volatility to remain high as the Fed goes through that transition," Keating said.
Lower liquidity, wider credit spreads and higher volatility will be the three key changes investors can anticipate as the Fed will begin slowly raising rates next year, said Bank of America Merrill Lynch.
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