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Portfolio > Economy & Markets > Stocks

4 experts make 11 predictions on stocks, economy for 2015

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Wary optimism, not great expectations, pinpoints the outlook for stocks in 2015, top equity strategists told our sister site, ThinkAdvisor, in interviews last week.

Next year — the third in the U.S. Presidential Election-Year Cycle and historically a strong one for stocks — is pegged as a continuation of the long bull market, though a handful of significant emerging shifts could make the ride less than smooth.

“There are lots of big, pivotal changes in terms of the direction of various indicators,” says Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch. “We have the first Fed tightening in nine years, OPEC’s behavior that effectively signaled they’re playing a long game of not cutting oil production — arguably, to stem the U.S. shale story; and a stronger U.S. dollar.”

Against the background of what they anticipate to be an extended pickup in the U.S. economic recovery, the experts are forecasting a wide variance in total return, ranging from a low of minus-5 percent, predicted by one strategist, up to 12 percent or slightly higher by another.

Large cap stocks are the place to be next year, all agree; and on the heels of the S&P 500’s record high set this year, in 2015 the index could rise to 2200, they predict.

Upcoming meaningful changes call for scuttling what has become a significant trend to short-term-focus investing; instead, the strategists urge a more advantageous long-term view.  

Here are highlights from conversations with John Buckingham, CIO, Al Frank Asset Management; Ben Inker, co-head of GMO’s asset allocation team; Savita Subramanian; and Scott Wren, senior equity strategist, Wells Fargo Advisors.

1. Overall equity outlook

John Buckingham: “The average stock will do better than the average index. As soldiers have done better than the generals over the long run, I expect a reversion to the mean. Total return: 10 percent -12 percent, or even a little higher.”

Scott Wren:  “Bullish, but not wildly bullish. Total return: 6 percent-10 percent. Not bad.”

Savita Subramanian: “A good year, though maybe not as great as the last three: we’re at the end of liquidity-driven market returns. But this year could be one of the best stock-picking hunting grounds in a while if you have a long-term time horizon and are able to weather a little volatility. Total return: 8 percent — a decent amount of upside from here.”

Ben Inker:  “From a valuation perspective, it’s hard to be excited about much, with the possible exception of emerging markets. U.S. stocks look pretty expensive. A decent year economically isn’t enough to justify much return out of them. Total return: somewhere between minus-5 percent to 5 percent. [I’m not] pounding the table that next year will be a blood bath or that it will be another 2013 either, where the market zooms higher.”

2. Interest rates

Wren:  “Once the Fed gets going, the road is going to be bumpy, though we probably won’t see much of that till 2016.”

Subramanian: “A modest rise, with the Fed tightening in September. Rates are going from low to less low, so yield will be an important part of the investor’s decision.”

Buckingham:  “The Fed and central bankers worldwide are likely to remain accommodative for longer than people had thought — rates could actually go lower depending on the economy.”

Inker: “Short rates have to start going up – unless the economy takes a turn for the worse.”

3. Effect of QE’s end

Subramanian:  “Last October we came off the IV.  A little of the volatility we’re seeing now may be driven by that. The Fed’s tightening will be a big break from the hyper-easy monetary policy.”

Wren: “There’s a lot of money sloshing around in the system. But you can’t put a gun to somebody’s head: ‘We want you to borrow money and to spend it!’”

4. Earnings

Buckingham: “Healthy — the caveat being the global economic climate.”

Inker:  “Earnings will have a hard time growing. We have one significant [headwind], the strength of the dollar, which will particularly hit the large-cap space.”

Wren:  “Growth of 6 percent or 7 percent. Good, not great.”

Subramanian:  “Five percent growth, a downtick from this year. The hit to earnings might be lower-cost oil than was originally anticipated – a negative to S&P 500 earnings.”

5. Volatility

Wren:  “Any volatility will come from bad print on Chinese GDP or bad European data or big supply disruptions, like Saudi Arabia cuts their supply in half.”

Subramanian:  “The transition from a three-decades-long regime of falling interest rates could be accompanied by pronounced volatility.”

6. GDP

Inker:  “Growth of 2 percent or 2-1/4 percent should be enough to cause unemployment to fall from 5.8 percent to 5 percent. Growth may not be a lot better than okay. If wages go up as a percent of GDP, profits will go down as a percentage.”

Subramanian:  A broad economic recovery with accelerated U.S. growth at 3.3 percent.  Better trends in consumption and employment, continued upside in housing, better investments stemming from businesses.”

Buckingham: “A reasonable guess is 2.5 percent to 3 percent. Much will depend on the health of the world: the U.S. isn’t an island.”

Wren: “Our GDP number is 2.8 percent. If I thought it was going to be 3.5 percent or 4 percent, I’d be a lot more fired up about small caps.”

7. Likelihood of a correction

Buckingham: “It wouldn’t surprise me if we had a 10 percent correction at some point.”

Inker: “If the standard is two standard deviations above historical pricing, the U.S. is looking reasonably close to a bubble. The rest of the world looks significantly farther [along].”

Subramanian:  “A re-run of the October 2014 pullback would be an opportunity to buy. But anything beyond a 10 percent or 15 percent drop is unlikely given that there’s still a lot of cash sitting on the sidelines: a sell-off could drive investors into the market.”

8. Large cap vs. small cap

Wren:  “Money will continue to flow to large caps. As opposed to small caps, they have many products, lots of international exposure and can easily obtain credit. Small caps are one-trick ponies in terms of products.”

Inker:  “If forced to be in the U.S., we’d pick large caps. Small cap stocks are priced about as high as they have ever been. It’s hard to see how they’re going to grow their valuation. They’re maybe the closest thing to a bubble — though we’re not seeing that much excitement about them.”

Subramanian:  “Large caps are a great place to be.  Rising interest rates could be a very negative story for small caps, which are much more credit sensitive. We’re calling for rising credit spreads next year – and spread-widening tends to hurt small caps.”

9. Favored sectors

Buckingham:  “Consumer discretionary, energy, industrials, materials, information technology.”

Wren:  “Technology, industrials, consumer discretionary — sectors sensitive to a continuation of the recovery. A lot of emerging markets are very dependent on demand from the U.S. and Europe, and that isn’t quite there.”

Inker:  “One of the nice things about a fair bit of the emerging world is that it’s priced for some really bad things. Some are going to occur, but all of them probably won’t happen. So owning a diversified basket of emerging companies priced for really bad stuff should work out okay.”

Subramanian:  “Technology and industrials. In both, we like the larger, older, less exciting stories — the semiconductor and big software companies, not smaller social media stocks or higher growth companies. Our fear with international is that there might be more pain to be felt in Europe; China looks fairly uncertain, and we’re a little less optimistic about emerging markets.”

10. Energy sector

Wren:  “We’re looking for oil to be around $90 a barrel at year-end 2015. If so, we’ll get more interested in energy – but not anytime in the near future.”

Subramanian:  “Energy is screening as a value trap in our quantitative model; that is, prices are falling faster than analysts are downgrading expectations.  Given the indiscriminate selling, it could be a very good opportunity for stock selection. But as an overall sector play, it isn’t time to jump in.  We’re forecasting that oil could dip as low as $50 on WTI [West Texas Intermediate] in the near term, which is not a great scenario to be in energy.”

Inker:  “By the end of 2015, the oil price will be higher than today. It would make a lot more sense in the $75 range than in the $61 range.”

Buckingham:  “The stampede out of energy stocks is worse than what we saw in 1929 and in financials in 2008. I own 9 percent energy. We like Ensco.”

11. Advice: Focus on long-term investing

Subramanian:  “Investors have been very short-term focused. That’s driven a much more reactive investment landscape. We’ve seen indiscriminate selling of certain themes, where they might have had a lot more [positive things] going on than [merely] exposure and some negative risk factors. Maybe the real contrarian way to invest is taking a long view with a holding period that isn’t minutes but years!”

Inker: “The macro and political stuff dissipates, and you’re left with: What is this company actually worth? Fundamentals matter most. In the long run, price doesn’t matter. It’s the cash flows you get out of the assets. As your time horizon lengthens, what happens to those cash flows becomes of paramount importance.”

Buckingham:  “There will always be some new boogey man. Try not to overreact to the short term. You need to focus on the long term and not even open up your statements!”

See also:

The underwriting forecast for 2015: NAILBA 33

2015 outlook: Why financial wellness is the next big trend

Annuity trends: 2015 and beyond


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