February 22, 2018 11:32 am CST
Is This For Real?
By Briton Ryle, Wealth Daily

It usually starts in late November and hits a crescendo during the month of December. And you will see stragglers announcing theirs in January. 

No, I'm not talking about holiday plans or New Year's resolutions. I'm talking about predictions and forecasts about the coming year for the economy, stock market, and individual stocks. 

In some ways, it's a silly exercise. No one can see the future — though plenty of windbags will tell you they can. I'll tell you right now: Don't trust anyone who says they know exactly what's going to happen in the stock market. The most accurate predictions are usually just extensions of current trends.

In general, humans don't see big changes coming. We tend to see current conditions continuing...

And those who do forecast big "black swan" events are just throwing darts while blindfolded, hoping something hits the mark.

Still, having a plan is helpful. We sure can't invest without having any expectations for the future. And besides that, predictions pieces are fun. Next to the actual profits your investments put up, predictions are a decent scorecard for how in tune you are with the markets. 

So at roughly the halfway point of 2015, I thought it would be fun to have a look at my predictions for 2015 and see how they are doing... 

I'm going to list them all, unedited from December 1, 2014, and then add a little commentary.

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). My Wealth Advisory subscribers are up around 80% on this stock since I recommended it at $9.40. REITs will also remain attractive, but other interest rate-sensitive stocks, like utilities, will underperform.

NOT LOOKING GOOD: While it does look as though we will finally get a rate hike this year, there's probably not enough time for three. As for my sector outlook, utility stocks have underperformed. Banks have done okay. REITs are off around 10%, I maintain they are attractive, but they are likely to take a short-term hit when interest rates rise.

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. 

CORRECT: Oil stock prices bottomed on December 11, 2014, so I say I nailed that. And oil itself has staged a moderate rebound, as U.S. production growth has slowed but not contracted. It seems highly unlikely oil will get to $85 this year, much less beat that mark. OPEC has not cut production as I expected, but still, on balance, I got this one right so far.

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. 

MIXED: Yep, the strong U.S. dollar continues to impact profits, so that was dead on. Caterpillar (NYSE: CAT) is down for the year, too. But after that dismal first quarter, it is highly unlikely that 2015 GDP growth will hit 3%. 

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. My target for the S&P 500 is 2,275 based on S&P 500 earnings of $127 a share.

NOT LOOKING GOOD: S&P 500 to 2,275? Increased volatility? Two corrections? Good Lord, what was I thinking?

Yeah, the general theme of "buy the dips" and "good year for stocks" has been correct so far. But volatility has been completely nonexistent, as the S&P 500 has traded in the tightest range in 20 years. It's reasonable to think volatility may still pick up, and rate hikes could spark a correction. But S&P 500 earnings are not going to hit $127 a share, and so we're not likely to see 2,275 this year...

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. 

CORRECT: Gold prices have been stuck as the strong dollar and expected rate hikes keep a lid on inflation. Miners rallied a little to start the year, but I'm willing to ignore the fact that they didn't "soar" if you are...

With rate hikes still on the table, I don't expect much from gold over the next six months.

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 I remain bearish on social media stocks. 

MIXED: Utilities have indeed stunk this year — it's the worst performing sector of the S&P 500. Energy stocks have indeed rebounded. But health care continues to lead the S&P 500, followed by consumer discretionary. Tech and financials have performed basically in line with the S&P 500. 

As for social media stocks, Facebook (NASDAQ: FB) is the only one that has done well. LinkedIn (NYSE: LNKD) and Twitter (NYSE: TWTR) are flat for the year. Yelp (NYSE: YELP) and Groupon (NASDAQ: GRPN) are down. 

Keep an eye on Twitter, though. It will be getting a new CEO at some point. Once it figures out how to monetize 300 million active users, the stock will soar. Bet on smart people. 

7. The Russian economy collapses. Without a doubt, my forecast of a crisis coming from Russia was my 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? I 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. 

JURY STILL OUT: Yes, Putin's stupid policies have sent Russia into recession... and probably made him a lot richer. But it's not exactly a crisis. To get there, we'd need to see oil back in the $40s or a surge in Russian aggression.

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.

MIXED: China's economy hasn't crashed. But the fact that I missed the gigantic move for Chinese stocks means I can't take credit for this one. I want to be clear, though: I don't trust Chinese stocks. There's too much fraud for my taste. 

Okay, there you have it. Two correct, one wrong, and the rest mixed. That's probably pretty good for predictions...

Until next time,

brit's sig

Briton Ryle

Bookmark and Share