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As we head into the new year, we see the United States economy emerging as a bright spot on the global stage.  For 2015, we expect to see above-trend growth, further improvement in private sector balance sheets, and generally improved confidence.  The domestic economy should perform better than Europe, where structural reform is still needed, and better than many of the emerging markets, which continue to struggle.  Chinese growth should continue to moderate, while Russia and other large net energy exporters will struggle given today’s lower oil price.

A recent modest pickup in volatility, slippage in Treasury yields, and a widening of credit spreads are likely noise, but still contribute to a downward path to our forecasted WCA Fundamental Conditions Barometer (discussed on page 8).  Accordingly, the equity/bond mix is aligned closely with the “neutral strategic” allocations.

On the plus side, we continue to see steady progress on private sector employment, and investment spending continues to rise.  The recent drop in energy prices, while creating some uncertainty for energy producers, should impart a sizeable benefit to consumers and global consumption.  The relief in energy prices should also help lower input prices for producers of goods and keep headline inflation relatively low.  Both of these are positive factors for the mix headed into 2015.

We see interest rates set to move higher predicated upon continued growth in the economy, further gains in employment, and an eventual pickup in inflation.  We do not, however, expect to see interest rates move higher rapidly.  Instead, we envision a long period of fits and starts and an overall slow progress toward normalizing interest rates.  The lack of appreciable inflation and continued below-average expected growth in the economy are key reasons why we expect the transition to higher rates to proceed in a very gradual way.

Our preference globally is to focus on United States equities and U.S. dollar assets, which should be the beneficiary of generally better growth patterns and prospects for relatively higher real rates.   .