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8 Predictions for 2015

And a Look Back at 2014

Written by Briton Ryle
Posted November 26, 2014

It hit me last Friday as I was having a meeting with one of my Angel Publishing colleagues, Keith Kohl of the Energy Investor newsletter: It's holiday time.

Maybe it was the warm autumn we had here in Baltimore. Maybe it's because both my kids are teenagers and don't write letters to Santa Claus anymore. Whatever it was, I was barely aware we were nearing the most wonderful time of the year.

Now, I'm in full holiday mode.

In order to beat the East Coast snowstorm, my kids and I made the drive last night to my brother's in Warwick, New York for Thanksgiving. My dad and stepmom arrived yesterday. It’s already snowing, and we may get a foot of the white stuff.

So let me wish you a Happy Thanksgiving. I sure hope you have a nice get-together planned with family or friends.

What’s Coming Up

I'm really looking forward to seeing how Black Friday retail sales are. As I've said, I expect this holiday season to be a strong one for spending. Sentiment has improved, more people have gotten jobs, and cheap gasoline has put a few extra bucks in our pockets...

Will that be enough to push the stock market higher through the end of the year? Perhaps, but I don't think there's a lot more upside for the rest of the year. The S&P 500 has already put in a 13% move for 2014, and its P/E ratio is getting up there at 19.3.

But what’s ahead for 2015? After a great year in 2014, that’s what’s on my mind.

Let’s start with a couple observations...

Stock markets do not advance by accident. Sure, perhaps on any given day, the Dow Industrials might be up or down, and the reasons may be obvious or a complete mystery (and let me add that anyone who thinks they always know why stocks move is wrong).

But to get a good, strong rally going or to sustain a bull market, you have to have earnings growth. Earnings are the oxygen to the stock market's fire, the gasoline for the engine.

Every other piece of data, every GDP reading, every employment report, and every inflation reading or other economic report is significant only in how it may affect earnings.

If more people have good jobs, they will spend more, so companies make more money. If the latest manufacturing survey is strong, it means companies are making more goods to meet consumer demand, and the companies can make more money...

Sounds simple, but the smartest people in the world focus their attention on what’s coming next for economies, and they often get it wrong.

Right now, there’s a pretty wide range of expectations for corporate earnings in 2015. Goldman Sachs is among the more bearish. It expects S&P 500 earnings to come in at $122 a share next year (the S&P 500 should do around $117 a share for this year, and it did $109 a share last year).

Goldman believes weak growth in Europe, China, Brazil, etc. will keep U.S. growth in check.

Howard Silverblatt is the head economist for Standard & Poor’s, the company that maintains the S&P 500. He thinks the 500 biggest U.S. companies will earn $133 a share in 2015.

That’s a pretty big range for earnings, so the ultimate direction for stock prices is far from certain.

And that actually could be quite bullish. The stock market does not like uncertainty. However, it does like upside surprises. If earnings do in fact come in stronger than expected, 2015 could be a darn good year.

But I don’t want to get too far ahead of myself here. Before we look forward, let’s take a look at my predictions from last year.

I’m not going to pull any punches about what I said last year. I’ll show exactly what I wrote right here in Wealth Daily and then add a little commentary/explanation/apology.

So let’s get to it...

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.

  1. 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: I'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.

  1. 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 I 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.

  1. 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.

  1. 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.

  1. 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 my 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%

I 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. I 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%.

  1. 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: I thought about trying to take credit here, but I just can't do it. Yeah, home-building has definitely showed some signs over the last two months. And homebuilder stocks have been strong, too. But home sales have not been anything to write home about

  1. 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... My 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.

Make sure to check out part II 2015 predictions right here in Wealth Daily. Get an advanced read on what should be a pivotal year.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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