With China’s economy still looking soft and Europe’s economy shaky, there are some potential storm clouds ahead for the markets in 2015.
“Compared to even last year, the sky looks a lot cloudier than it did before, and we’re not talking about those pretty fluffy things where you can see Abraham Lincoln. They look like storm clouds over a number of markets, but that’s not to say we can’t have a good year,” said Patrick Young, executive director of advisory firm DV Advisors and publisher of the Exchange Invest newsletter.
China is expected to see its gross domestic product growth slow to closer to the 7% area, while Europe teeters on the brink of recession. Japan fell back into recession in late 2014. Only the U.S. economy is still growing. While Young said he sees no reason for the U.S. economy to not grow, he said given that it has strung together many months of expansion, just based on statistical averages the U.S. economy could falter.
He’s keeping an eye on the bond market, he said, and not just the U.S. bond market, but the global market.
“How sustainable is it for companies whose balance sheets are not much more than a few overdrafts and a bunch of Groupon coupons to be able to borrow at 5% or 6%? That’s clearly to me, the biggest potential dislocation, which is going to happen sooner or later. I couldn’t tell you how it’s going to happen or why it’s going to happen. But that’s going to have a very significant overhang in every single type of option and not just options on interest rates per se. That’s the biggest (negative) economic cloud I can see in the sky,” Young said.
It’s possible, though that if Europe launches a massive quantitative easing program and Japan continues with its QE program, then those actions could offset some of these potentially negative factors.
“Who knows, the vodka punchbowl of easy money might be flowing again and bring back the party. But at the same time I do wonder about the fact that it seems like funny money is sustaining vast swaths of the economy, and I’m talking about Europe and other parts of the world,” he said.
There may be some stumbling blocks out there in 2015, but Young also said the new year could offer lots of opportunity for high volatility. That comes after 2014 saw volatility fall to multi-year lows before picking up at year’s end.
“What could be very interesting for option traders, and what they may want to focus on is that this could be the year that volatility really bounces back. We could see it bounce back across the agenda,” he said.
There could be “a multitude of exciting potentialities for option traders and option investors who are going to be looking at playing all manner options from the long side to benefit from what will probably be overall expanding volatility with occasional moments in time when volatility get crushed flatter,” he said.