Market Update
by Brooke Thackray, AlphaMountain Investments
At this time of the year it seems that so many analysts are making stock market forecasts for the upcoming year. If you are a bearish analyst, your forecast is typically for an 8% return. If you are a bullish analyst, your forecast is for a 12% return. Outside of this range, analysts are taking on career risk. Of course, there are the few analysts that are willing to stick their neck out. If you have a big name in the fi nancial industry and you make a very bullish call, outside of the normal range, the media will fl ock to you.
Today, I am not going to make a prognostication about the stock market level at the end of 2015. Even if I believe that the market is overvalued, and I do, the market can stay overvalued for an extended period of time….years. In some ways, trying to make a exact call on the market a year out from now is pointless.
The stock market has been on an extended bull run from 2009. So what now? If the U.S. market really is on solid ground and is now under its own power, then it is possible that the upcoming year or two may produce good returns in the stock market. On the other hand, if the economy has been artifi cially supported by Fed policy, then a slow deterioration is more likely to occur.
Right now, the U.S. economic numbers appear to be acceptable, at least through the U.S. kaleidoscope. Some numbers are good, some not so good, but overall they are acceptable. The problem is that the global backdrop is weak. Back in the 1990’s the fi nancial industry used to propagate an analogy, comparing the world economic balance to an airplane fl ying on three engines: the U.S. one engine, Europe another and China the third. If one economy was suffering, the other two would support world economic growth. Today, as China slows and Europe fi ghts defl ation, the world is fl ying on the power of one engine: the U.S.
If the U.S. starts to slow down, the plane can only glide for so long before the situation becomes ugly. As much as the U.S. is a superpower, it can only sustain world growth for so long. Right now North American investors are very myopic and are focused on the U.S., not realizing the deterioration that has taken place in other major economies and stock markets. The fear is that if the U.S. economy does start to sputter, investors will look outside the U.S. and realize that everything is not as good as it once seemed. At that point, the euphoria will wear off and the stock market will suffer not just a quick drop and then rally, but a more sustained correction.
I apologize for being so depressing and I am not stating that the U.S. economy will indeed suffer a long contraction. I am just pointing out a possible route to demise. Unfortunately, with the market richly valued at a forward P/E ration of 17 (Thomson Reuters, January 2, 2015). and low profi t growth expectations of 8% for 2015, there does not appear to be much upside in the market. Are we going to get a repeat of the S&P 500’s performance in 2013, with a 30% gain? Probably not. At this point the best we can hope for is moderate returns in the stock market.
Does this mean investors should exit the stock market? No, but it does mean that caution should be used and expectations should be tempered. In this environment broad market seasonal trends tend to be more predominate, with end of month gains and the six month favorable/unfavorable cycle more likely to result.
The world of investing is always interesting and 2015 is not expected to be the exception.
Read/Download Brooke Thackray's complete Market Letter report below:
Thackray Market Letter 2015 January(1)
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