My Stock Market Forecast for 2015

Posted on December 9, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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All Forecasts Will Be Wrong

[By Lon Jefferies MBA CFP®]

Lon JeffriesThe investment media is a rare industry in which professionals are rewarded for making bold projections but never punished for being wrong. The more outlandish a pundit’s forecast the more attention it receives.

Yet, surprisingly little consideration is given to how accurate the prediction turns out to be.

At the beginning of 2014, there were some widely-accepted expectations regarding the investment environment.

Let’s review those predictions and analyze how precise they really were.

Interest Rates

In a study conducted by Bloomberg at the beginning of the year, all 72 economists surveyed predicted higher interest rates and falling bonds prices in 2014. Consequently, investors were questioning whether they should reduce or eliminate the bond portion of their portfolios until the rate increase occurred.

So, have we experienced this rise in interest rates?

On January 1st, 2014, the yield on the 10-year Treasury note was 3 percent. On November 13th, the yield on the same note was 2.35 percent. That’s right — interest rates actually decreased significantly during the year. As a result, intermediate U.S. government bonds (ticker – IEF) produced a return of 7.38% during the year. Not bad for the conservative portion of your portfolio!

Quantitative Easing

The most widely promoted fear among forecasters was that the phasing out of the Federal Reserve’s quantitative easing (QE) program would diminish stock returns. Prognosticators worried that the Fed would lower the amount of loans the government would buy from commercial banks, thus reducing the amount of money available for new businesses to borrow leading to less innovation and the creation of fewer jobs.

But, was the reduction of quantitative easing a legitimate fear? In fact, this possibility came to fruition. In December of 2013, the Federal Reserve was buying $85 billion of financial assets from commercial banks each month. The Fed reduced this amount during every meeting it held this year, finally eliminating the action completely in October.

However, the elimination of Quantitative Easing did not have a negative impact on the unemployment rate, which declined from 6.7% in January to 5.8% in October. Further, the S&P 500 has gained 12.31% year-to-date (as of 11/13/14). Clearly, fading out the Quantitative Easing program didn’t have the negative impact on stocks that many pundits expected.

Increased Volatility

Another widely held viewpoint at the beginning of the year was that 2014 was likely to be more volatile than anything experienced in 2012 or 2013. There was talk about valuations and P/E ratios being too high, concern about the war in Ukraine (ISIS wasn’t even in the headlines yet), and endless noise about unfavorable weather patterns impacting the market.

So, has 2014 been a wild ride? Since 1929, the S&P 500 has experienced either a rise or a decline of more than 1% during 23% of trading days. In 2014, the S&P 500 moved more than 1% only 15% of the time. Less movement equates to less volatility, so again forecasters were inaccurate.

2015 Forecasts

Bloomberg News recently published a story titled Predictors of ’29 Crash See 65% Chance of 2015 Recession, in which the grandson of a prognosticator who luckily forecasted the Great Depression is still getting attention for a guess his grandfather made 85 years ago. If giving credence to forecasters isn’t ridiculous enough, suggesting there is a gene for forecasting is insane!

The article doesn’t mention that the same grandson made similar headlines with the same forecast in both 2010 and 2012; of course, those predictions did not work out so well. You will start hearing many 2015 projections soon, so pay no heed.

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glasses

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Ignore the Pundits

The most significant lesson inherent in these numbers is that market expectations are essentially useless. Despite their abysmal track record, the news media loves forecasters because they capture attention and fill space. Unfortunately, pundits making projections are rarely held to their inaccurate forecasts and are allowed to continue making a living showing they have no greater knowledge than the average investor.

Of course, this is not to say that interest rates will never rise, that bond values will never decline, and that the market won’t return to the roller coaster it is. In fact, all those things are certain to happen. Unfortunately, anyone who contends to know “when” likely doesn’t actually know anymore than you or me. For this reason, having and sticking to a diversified investment strategy that coincides with a detailed financial plan is the most probable path to financial success.

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5 Responses

  2. Lon Jefferies CFP MBA, on January 5, 2015 at 6:50 PM said:

    The Best of 2014

    I thought I would pass along my favorite article from 2014, titled 122 Things Everyone Should Know About Investing and the Economy, which was written by Morgan Housel and published in the Motley Fool. The article contains 122 brief thoughts and lessons about both investing and life, all of which are thoughtful, insightful, and worthwhile.

    I strongly encourage you to take 15 minutes reading and thinking about the notes of one of my favorite authors.

    The article can be found here:

    http://www.fool.com/investing/general/2014/12/12/122-things-everyone-should-know-about-investing-an.aspx?utm_source=Jan+2015+Lon&utm_campaign=Lon+Jan+Newsletter&utm_medium=email

    Lon Jefferies CFP MBA
    http://www.NetWorthAdvice.com

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  3. Heather, on February 3, 2015 at 11:33 AM said:

    Don’t Expect a Repeat of January

    Just because January was a downer of the month for the markets, don’t plan on the rest of the year to be bad.

    http://www.nuveen.com/Commentary/BobDoll/WeeklyCommentary.aspx?utm_source=WeeklyCommentary&utm_medium=Twitter&utm_campaign=bobdoll

    Here is Nuveen’s Bob Doll’s weekly investment commentary.

    Heather

    Like

  4. Raymond, on May 1, 2015 at 7:58 PM said:

    How to Make Sense of Weak Economic Growth in 2015

    Another year, another winter slump.

    That’s the most basic conclusion to draw from new numbers on first-quarter gross domestic product just released.

    The American economy grew at only an 0.2 percent annual rate in the first three months of 2015, which was a good bit less than the 1 percent analysts forecast, and the worst showing since, well, the first quarter of 2014.

    Raymond

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  5. Dara Albright, on December 22, 2015 at 10:44 PM said:

    The 2016 Predictions of a Self-Proclaimed Crowdfinance Semi-Clairvoyant

    Another December 2015 is upon us, and once again it is time to dust off that flux capacitor, steal some plutonium and see what the future holds.

    Since I was 4 for 4 in my 2014 predictions, last year I proclaimed myself a “Crowdfinance Clairvoyant”. Although I didn’t score as well this year, don’t revoke my title just yet. Most of my 2015 prognostications are still unfolding. As someone who is neurotic about completing tasks ahead of schedule, I guess I just tend to have an overly enthusiastic timetable.

    MY 2015 FORECAST REVISITED:

    1. I predicted that in 2015 a lot more attention would be given to venture exchanges and secondary markets. I also anticipated that legislation would be introduced to establish a new framework for small company liquidity. In May 2015 the “Main Street Growth Act” was introduced by the House Financial Services Committee. The proposed bill calls for the creation of “venture exchanges” to support secondary trading of private shares. I’ve pronounced on multiple occasions that while the JOBS Act increases a smaller company’s ability to access funds, it fails to tackle their most pressing need – a respectable marketplace where they can blossom. Without a vibrant venture exchange, exempted crowdfinance offerings will never have the chance to gain mass traction. This bill provides some hope.

    2. Last year, I projected that data would transform securities marketing. Although issuers still relied on traditional marketing programs like “dog and pony” roadshows and sales calls in 2015, I still maintain that we are in the early stages of a “FinTech Data” revolution, and that a process known as “algorithmic deal matchmaking” will ultimately change the way securities are marketed and sold to the public. Dealflow is doing some really groundbreaking work in this area. (Check out: http://daraalbright.com/2014/10/09/the-evolution-of-securities-marketing-and-its-impact-on-issuers-intermediaries-and-investors/ and http://www.thealphapages.com/content/dealflow-keeping-the-fin-in-fintech?_ga=1.29102396.1833424154.1445874305).

    3. I also prophesied that financial planners and retail investors would flock to P2P funds. I stated that “in the coming years, expect a growing number of conventional banks and brokerage firms to begin offering their retail clients an opportunity to invest with P2P fund managers, especially through self-directed IRA accounts.” While they have yet to flock, I believe that an incredible amount of groundwork is currently being laid for the “flocking” to ensue. In fact, in 2015, a number of new products, tools and technologies have already emerged to support financial advisors and their retail clientele (see: http://daraalbright.com/2015/06/03/the-road-to-crow-centric-retail-alternatives-and-the-future-of-financial-products/ and http://daraalbright.com/2015/04/13/financial-advisors-please-meet-p2p-p2p-online-or-marketplace-lending-or-whatever-you-want-to-call-yourself-please-meet-financial-advisors/).

    4. Last year I went out on a limb and predicted that the “accredited investor” rule would be amended – if not abolished altogether. Although I stated that this was unlikely to occur in 2015, I believed – and still do – that it will happen eventually. I maintain that this rule is unconstitutional and discriminatory. And its injustice remains a big part of my reason for directing my attention to the underserved retail investor market.

    5. I predicted that in 2015 the SEC will implement its final rules for Title IV (Reg A+), and that that the new regulatory framework would include a preemption of state blue sky laws – despite NASAA’s threats. This did indeed happen on June 19, 2015. While Reg A+ has yet to change the small cap IPO landscape, I do believe that the stage has now been set.

    6. Finally, I predicted that 2015 would be another banner year for FinTech IPOs with Prosper leading the next-generation of online lending companies into the public arena. In addition to Prosper, I suggested that the following crowd-centric companies had the potential for being public in 2015: CircleUp, Indiegogo, Kabbage and Funding Circle. I was way off on this one. I guess this is a shining example of where my optimism stands in the way of reason. With so much private capital chasing them, today’s hottest growth companies have no desire to be public. Just ask UBER

    (see: http://www.crowdfundinsider.com/2015/10/76123-how-much-money-would-you-be-worth-if-you-had-invested-in-uber-on-angellist/).

    Dara Albright

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