“Hopefully, we won’t get back to the unproductive discussions about raising the debt ceiling,” he says. “But there are other, much more significant issues that remain unresolved that Congress needs to tackle soon, such as tax reform [and] solving the longer-term structural problems in the U.S. federal budget, among others. The capacity to compromise and make decisions efficiently would be tested, and the markets would be looking for some sign of cohesion in policy making.”

Terry D. Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, says he expects U.S. equities to “grind” higher and the U.S. economy to limp along in 2015. (He uses the word “grind” three times during the course of the interview.)

“The prevailing wisdom is that the market got ahead of itself,” he says. “We are in the sixth year of a bull market, and investor nervousness is high.”

He cites the pullback the market saw in mid-October. He says it might be too early to see a significant pullback while the
market is at or near all-time highs and profit margins are near peak levels, but the market may see some volatility during 2015.

Sandven sees equity prices as still moving up, but possibly at a slower pace. He says the economic outlook is optimistic for the beginning of 2015 and cites an increase in consumer discretionary spending and low energy prices that should bode well for the economy.

He says some sectors might outperform. He cites health care as “a favorite for all seasons.” He likes the technology sector, too, as U.S. consumers continue to purchase the latest devices such as cellphones and TVs.

A possible problem is a slowing in global economic growth. But he notes the global economy isn’t slowing at an accelerated rate.

The other wild card, Sandven says, remains Europe. The European economic slowdown may affect the earnings of U.S. multinationals.

What keeps him up at night? Geopolitical tension could derail the market. Renewed inflation and higher interest rates could also put pressure on margins.

“It’s an earnings-driven market,” Sandven says, explaining that the market needs the global economy to grow to support a higher equity market.

The economic slowdown in China is also worrisome, he says.

He adds that continued gridlock in Washington has already been factored into the financial equation—and that this is not necessarily a bad thing, though it’s worrisome when Congress starts talking about reform. He expects noisy budget battles to continue. Republicans taking control of the U.S. Senate might turn out to be a positive, he notes, if it leads to bipartisanship.

“History shows that bipartisan governance can be good for equity performance,” Sandven says.

“For me, the pace of earnings growth and/or inflationary pressures at some future time will be the biggest hurdles for the equity market. At present, the U.S. economy continues to reflect varying degrees of improvement, and the fundamental backdrop of rising earnings, low interest rates and restrained inflation remain intact. Hence, while a market pause is in order, I still think we’ve a buy-the-dips, grind-higher equity market.”

William L. Haacker is an award-winning journalist and editor who has worked for various New Jersey newspapers, including Gannett New Jersey.

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