US equities: 2015 better than 2014

2015 will be better for US equities than 2014, according to Ari Wald, Technical Analyst at Oppenheimer.

Wald thinks that 2015 will be a better year for stocks because small-cap stock indexes, like the Russell 2000, are showing signs of resuming higher following a year of sideways trading. Furthermore, he believes the view that equities are due for a bear market overlooks the fact that 2014 may have been it. While the S&P 500 returned 11.4% last year, the Russell 3000 rallied a more modest 6.6% and the Russell 2000 managed an advance of only 3.5%.

Wald expects the US yield curve to flatten and says that stocks can do well when the yield curve flattens (see chart), and it becomes a warning sign when the curve inverts: “This is not to say that a flatter curve is a market positive, but instead that equities face the risk of a mid-cycle correction, which are typically more sideways in nature, rather than a sharply lower decline. For instance, a flatter curve coincided with corrective periods in 1994 and 2004, providing a pause to refresh each ongoing advance, while an inversion in the curve preceded the final economic contraction in each instance.”

Tactically, Wald recommends using the latest equity consolidation and coinciding bond market rally to 1) buy stocks, 2) sell short-dated bonds, and 3) hold a bullish position in long-dated bonds.

See chart.