alth D Stock Market Predictions for 2015. Special Report Review: 2014 Predictions 1. We WILL NOT see a 10% correction in 2014. This one speaks for itself. The reason for this bullish call is that we think 2014 is the year the U.S. economy starts cooking again. By the end of the year, we expect to see GDP of 3.5%, surprising everyone. WRONG: We got a 10% correction — exactly 10%, which is a little weird. I don't mind this one, as we got the general market call correct: the bull market would continue. 2. Russia will be the source of a moderate economic crisis. Russia's resource-based economy is already struggling, and there's a strange post-Olympic depression that tends to hit host countries. Even though we expect oil prices to be strong, Russia (not China) will suffer a crisis of confidence. CORRECT: We've never been a fan of the Russian economy for several reasons. For starters, it's far too lopsided, dominated by oil and natural gas. And Russia failed to invest in other industries that would have helped it diversify. Russia is also horribly corrupt. Of course, we did not expect Putin's imperialism to be the big catalyst. And it may even be stretching things to call this a financial crisis (unless you are in Eastern Europe). Still, I'm still going with "correct" for this one, as Russia has been the global flashpoint for 2014. 3. U.S. GDP will beat expectations in the second half. Full-year GDP growth will hit 3.5%, but we also think we'll see blowouts above 4% in the 3rd and 4th quarters. CORRECT: Even though we didn't get the order right, we are seeing GDP expand. Q2 GDP hit 4.6%, and Q3 GDP hit 3.9%. The polar vortex in the first quarter hit GDP so hard that full-year growth will likely miss my 3.5% target. Still, the trend was correct, and if you were investing on the expectation that growth would accelerate, you did well. 4. Gold will trade as high as $1,500 an ounce. Gold will put in a nice rally in the first half of the year, peaking at ~$1,500, but then stronger growth will take over, and gold will trade lower in the second half. CORRECT: Though the price didn't make it to $1,500, gold did rally to start the year, from $1,200 to $1,330. The rest of the year was a disaster, especially the second half. If you were trading for a downside move for gold, you got it. 5. Strong economic growth and the prospect of legalizing U.S. oil exports will push WTI to $120. Energy was a so-so performer in 2013. In 2014, oil prices will break out — big time. WRONG: Just wrong. There's no spinning this one. Massive production gains from U.S. shale fields completely overwhelmed economic growth and crushed oil prices. 6. Social media stocks will underperform, and energy will be the best-performing sector of the S&P 500, followed by financials, materials, consumer discretionary, and technology. Maybe it's silly to question the upside of “unlimited growth” stocks like Twitter. But with a big lock-up ending in May, we think the stock will get whacked. RIGHT AND WRONG: See, this is why you never double-dip your forecasts. If you're wrong, then you're wrong twice. Energy was outperforming in the first half of the year, and if that had continued... well, you know, if our dog meowed, it'd be my cat. Sector SPDR Fund % Change S&P 500 Index +11.64% Consumer Discretionary (XLY) +4.88% Consumer Staples (XLP) +12.73% Energy (XLE) -0.01% Financials (XLF) +10.75% Health Care (XLV) +23.23% Industrials (XLI) +9.41% Materials (XLB) +9.63% Technology (XLK) +16.59% Utilities (XLU) +20.36%
Transcript
Wealth Daily
Stock Market Predictions for 2015.
Special ReportReview: 2014 Predictions
1. We WILL NOT see a 10% correction in 2014. This one speaks for itself. The reason for this bullish call is that we think 2014 is the year the U.S. economy starts cooking again. By the end of the year, we expect to see GDP of 3.5%, surprising everyone.
WRONG: We got a 10% correction — exactly 10%, which is a little weird. I don't mind this one, as we got the general market call correct: the bull market would continue.
2. Russia will be the source of a moderate economic crisis. Russia's resource-based economy is already struggling, and there's a strange post-Olympic depression that tends to hit host countries. Even though we expect oil prices to be strong, Russia (not China) will suffer a crisis of confidence.
CORRECT: We've never been a fan of the Russian economy for several reasons. For starters, it's far too lopsided, dominated by oil and natural gas. And Russia failed to invest in other industries that would have helped it diversify. Russia is also horribly corrupt.
Of course, we did not expect Putin's imperialism to be the big catalyst. And it may even be stretching things to call this a financial crisis (unless you are in Eastern Europe).
Still, I'm still going with "correct" for this one, as Russia has been the global flashpoint for 2014.
3. U.S. GDP will beat expectations in the second half. Full-year GDP growth will hit 3.5%, but we also think we'll see blowouts above 4% in the 3rd and 4th quarters.
CORRECT: Even though we didn't get the order right, we are seeing GDP expand. Q2 GDP hit 4.6%, and Q3 GDP hit 3.9%. The polar vortex in the first quarter hit GDP so hard that full-year growth will likely miss my 3.5% target. Still, the trend was correct, and if you were investing on the expectation that growth would accelerate, you did well.
4. Gold will trade as high as $1,500 an ounce. Gold will put in a nice rally in the first half of the year, peaking at ~$1,500, but then stronger growth will take over, and gold will trade lower in the second half.
CORRECT: Though the price didn't make it to $1,500, gold did rally to start the year, from $1,200 to $1,330. The rest of the year was a disaster, especially the second half. If you were trading for a downside move for gold, you got it.
5. Strong economic growth and the prospect of legalizing U.S. oil exports will push WTI to $120. Energy was a so-so performer in 2013. In 2014, oil prices will break out — big time.
WRONG: Just wrong. There's no spinning this one. Massive production gains from U.S. shale fields completely overwhelmed economic growth and crushed oil prices.
6. Social media stocks will underperform, and energy will be the best-performing sector of the S&P 500, followed by financials, materials, consumer discretionary, and technology. Maybe it's silly to question the upside of “unlimited growth” stocks like Twitter. But with a big lock-up ending in May, we think the stock will get whacked.
RIGHT AND WRONG: See, this is why you never double-dip your forecasts. If you're wrong, then you're wrong twice. Energy was outperforming in the first half of the year, and if that had continued... well, you know, if our dog meowed, it'd be my cat.
We also missed the sector performance. Health care was the clear winner, followed by utilities (Utilities?!?! Really?). In regard to utilities, it’s a clear case of yield chasing. Bond yields are so low that institutional investors have piled into what appear to be stable-yielding stocks like utilities.
But when (if?) interest rates rise, utilities will not do well. We expect other income stocks like REITs and MLPs to do better because they have inflation clauses in the contracts they sign with customers. When inflation rises, they can charge more.
At least the call on social media stocks was correct. Facebook held strong and really proved its value as a company. But Twitter lost around 35% for the year. Yelp was only down around 10%, but if you'd bought the March highs around $95, you would have lost 40%.
7. Home construction will improve dramatically, helping push employment numbers. How's this for a contrarian call? So far, rising interest rates have squelched mortgage demand. But that trend changes this year. More people will get jobs, wages will start rising, and that will get a flood of home-buying started.
WRONG: We thought about trying to take credit here, but we just can't do it. Yeah, home-building has definitely showed some signs of improvement over the last two months. And homebuilder stocks have been strong, too. But home sales have not been anything to write home about.
8. The Baltimore Orioles will win the World Series. Hey, what the heck, right? Nobody remembers predictions anyway, or so we hear...
DANG IT ALL, WRONG: So close... Our beloved Baltimore Orioles won the American League East, beat Detroit in the divisional series, and then fell to the Kansas City Royals in the AL Championship Series. The Royals lost in the World Series to the San Francisco Giants.
Is 3.5 Good?
So, we got 3 ½ right last year. That doesn't sound too good, but hey, the prediction biz is a tough one. We actually feel pretty good about that 3 ½, especially the call on Russia.
Now, let's get right to it and get the 2015 Predictions in the books...
1. We will see three 0.25% interest rate hikes. The Fed has no choice but to hike interest rates. The Fed Funds rate has been too low for too long.
However, the Fed is not likely to go on a prolonged rate hike campaign a la Alan Greenspan in 2003–2004. Ultimately, interest rates may rise to the ~3% range by the end of 2016, but it's going to be a while before we see the Fed Funds rate back above 4% — and we may never see that again.
Banks will be a big beneficiary of rate hikes. You are probably well aware that I am bullish in Bank of America (NYSE: BAC). Wealth Advisory subscribers are up around 80% on this stock since it was recommended it at $9.40. REITs will also remain attractive, but other interest rate-sensitive stocks, like utilities, will underperform.
2. Oil prices capped at $85. It is unlikely that global demand for oil will make a big jump higher. And so the only real catalyst for oil prices is production cuts. Because of relatively high debt loads from investment, we do not expect significant production cuts in the U.S.
That leaves OPEC. OPEC is likely to cut production in the first half of 2015, but such action will not push prices back above $100. The share prices of U.S. oil stocks are attractive now.
3. 2015 U.S. GDP growth will be between 3% and 3.5%. After a strong finish to 2014, growth will stall a bit for 2015. The strong U.S. dollar and weakness in Europe, Russia, and South America, combined with a slowing Chinese economy, will once again keep a lid on growth.
The strong U.S. dollar is going to be a very important story in 2015. Multinational companies will suffer a small decline in earnings due to it, and Caterpillar (NYSE: CAT) in particular could suffer.
4. S&P 500 hits 2,275, but volatility increases. For the last couple of years, the stock market has been a one-way trip higher. That changes in 2015. Stock prices will be much more volatile. It will still be a “buy the dips” market, but the dips will be bigger. Don't be surprised if we see at least two 8%-10% corrections.
Still, on balance, it will be another good year for stocks. The U.S. remains the most attractive market in the world, and the strong U.S. dollar should attract more global investment. Our target for the S&P 500 is 2,275 based on S&P 500 earnings of $127 a share.
5. Gold prices stuck between $1,100 and $1,300. Look for a gold rally early in 2015 that sends small gold stocks soaring. Unfortunately, the prospect of higher interest rates and a strong U.S. dollar will keep prices contained.
6. Tech stocks will lead the S&P 500. In 2014, health care and utilities were the strongest sectors in the S&P 500. In 2015, tech will lead, while utilities and consumer discretionary underperform. Given how far energy stocks have fallen, they could be due for a nice bounce once oil prices stabilize, and solar stocks should perform well, too. Financial stocks should also do well as interest rates rise, but we remain bearish on social media stocks.
7. The Russian economy collapses. Without a doubt, my forecast of a crisis coming from Russia was our best call for 2014. And it ain't over yet. Vladimir Putin is playing a very dangerous game with Ukraine. Sure, he's extremely popular in Russia, but the Russian economy has only begun to tank.
Will he remain popular when the Russian economy really goes into recession? Will the oligarchs get sick of losing money because of Putin's confrontational stance and take him out mafia-style? We don't have the answer. But oil prices below $80 will crush the Russian economy and make Putin more desperate. This isn't going to end well.
8. No crash for China. For years, stock market prognosticators have predicted a crash for the Chinese economy. I don't think it's going to happen, and that's because it's not a free market.
It seems to me the Chinese Communist Party can keep printing money and covering the economy's problems as long as it wants. You can't buy or sell the yuan on the open market, so there's no real system of checks and balances on China's leaders. You can make money shorting China when the time is right, but don't bet on a collapse.
Ok, there you have it: our outlook for 2015. We're already having second thoughts about three interest rate hikes from the Fed, but we can't turn back now...
You can view the HTML version here: Stock Market Predictions for 2015.
