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December 22, 2014

5 Stock Market Predictions for 2015

By John Whitefoot, Profit Confidential

Catalysts for Growth in Place for Solid 2015 

Admittedly, stock market forecasts can mostly be flimsy attempts to predict what irrational investors do in uncertain times. That doesn’t prevent most pundits from being overly optimistic.
At the end of 2013, I predicted that the U.S. stock markets would continue their bullish ways in 2014. This wasn’t a huge leap when you consider the Federal Reserve hinted it would keep interest rates—the fuel that has been propelling the stock markets steadily higher—near record-lows.
Even though the U.S. entered 2014 in the grip of a brutal winter and economic indicators were blah—the outlook for the stock market still remained robust. Why? Investors didn’t seem to care about underlying fundamentals; it was all about interest rates. In fact, investors have rewarded and empowered Wall Street underachievers all year long.
Case in point: in 2013, the S&P 500 climbed a whopping 30%. It did so in spite of the fact that an increasingly larger number of companies warned about revenues and earnings quarter after quarter. For example, during the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance; during the second quarter, 81% of companies issued negative guidance; in the third quarter, that number rose to a record 83%; and in the fourth quarter, that record fell when 88% of companies issued negative earnings guidance.
Despite the weak economic data flowing in, the S&P 500 hit record-high after record-high. And there was no reason to think that sentiment wouldn’t continue into 2014, especially in light of the fact that the U.S. economy was starting to show faint signs of life.
If the S&P 500 can soar 30% on the heels of weak earnings and record stock buybacks, imagine how investors will reward companies when they actually report decent results. So far, it looks as though the S&P 500 will record an annual gain of around 10%—more modest than 2013, but double-digit growth is always respectable.
And 2015 looks like it will be even brighter.
2015: Another Year of Double-Digit Gains?

Positive fundamentals are in place here in the U.S. and most of the catalysts for growth are bullish. I see no reason why investors won’t propel the S&P 500 significantly higher in 2015. That doesn’t mean there aren’t areas of serious concern and the ride certainly will be bumpy—but investors can make money whether the markets are going up, down, or sideways. You cannot control what other investors do, but you can control how you respond to market opportunities.

Below are my five economic predictions for 2015.

Stock Market Prediction #1: The U.S. Economy Will Continue to Improve

The U.S. economy continues to improve as economies globally continue to struggle. Unemployment in the U.S. remains under six percent, housing continues to be solid, consumer confidence is up, retail spending is strong, and U.S. manufacturing output is robust.
While the U.S. announced strong third-quarter gross domestic product (GDP) growth of 3.9%, it is expected to post 2014 GDP of 2.3%. But 2015 should be better. The International Monetary Fund (IMF) forecasts U.S. economic growth of 3.1% in 2015. This economic sentiment is echoed by Fitch Ratings, which maintained its GDP forecast of 3.1% for next year and three percent in 2016.
The strong economic underpinning and uncertain global economy has helped the once-laggard U.S. dollar rebound. After two underwhelming years, during which the U.S. dollar declined 0.005% in 2012 and climbed 0.006% in 2013 (against six major currencies); in 2014, it bounced back.
The strengthening U.S. dollar, near its highest levels since early 2009, is up 10.3% year-to-date. Most dramatically, it has climbed 8.8% since the beginning of September. Thanks to the improving U.S. economy, that momentum could continue throughout 2015.
Stock Market Prediction #2: The Eurozone Will Continue to Struggle

The eurozone, the largest economic region in the world, will continue to struggle in 2015. If the area’s biggest economies don’t report improved growth, the entire eurozone could enter into another recession in 2015.
Germany, the eurozone’s biggest economy and the world’s fourth largest, narrowly avoided falling into a recession in the third quarter when it announced abysmal third-quarter GDP growth of just 0.1%. In the second quarter, the country’s economy contracted by 0.1%. Two consecutive quarters of negative growth means recession. And Germany’s central bank is not exactly bullish on the economy; it slashed its 2015 economic forecast in half, from two percent to just one percent.
France, the eurozone’s second biggest economy and the world’s fifth biggest, announced anemic third-quarter GDP growth of 0.3%; sadly, that represents the fastest pace in more than a year. For 2015, the European Commission slashed it’s GDP forecast for France from 1.5% to 0.7%.
Italy, the third-largest economy in the eurozone, fell back into a recession in the third quarter after its economy dropped 0.1%—the 13th consecutive quarter that it has failed to grow. The year 2015 is not going to be kind to Italy. With unemployment at a record 13.2% and youth unemployment at an eye-watering 43%, it isn’t a big surprise to learn that Italy’s 2015 GDP growth is forecast to come in at around 0.5%.
The health of the eurozone is important for U.S. investors because approximately half of the S&P 500-listed companies get sales from the eurozone. Weak sales from the eurozone will translate into depressed earnings here at home.
Stock Market Prediction #3: China Will Stumble

The expected interest rate increase next year by the Federal Reserve could hit emerging-market economies like China and Russia.
China, the global economic engine, will stumble in 2015. Well, it will stumble relative to China’s normally exceptional historical growth trends. Depending on whom you ask, China’s 2015 GDP growth could slow to between 6.5% and 7.1%. For this year, China is forecast to report GDP growth of 7.4%.
Stock Market Prediction #4: Russia Will Sink into a Recession

Russia gets roughly 16% of its GDP from oil and gas revenues. Needless to say, the country’s economy is getting hammered by plummeting oil prices. (And, of course, economic sanctions.)
Despite intervention from the Russian central bank, the ruble is free-falling, down 50% this year. And inflation is soaring. Since mid-November, Russia has raised its interest rate three times, from eight percent to 17%.
In 2015, Russia will continue to see ultra-low oil prices, high interest rates, double-digit inflation, a devalued dollar, and weak retail sales growth. Russia’s Ministry of Finance might be optimistic about 2015, but everyone else sees the country’s economy contracting by 0.7%.
Stock Market Prediction #5: Federal Reserve Will Hike Rates

After three rounds of quantitative easing and years of artificially low interest rates, the Federal Reserve’s monetary experiment is finally coming to an end. Short-term interest rates, which have been pegged between zero percent and 0.25%, will rise to one percent in 2015.
The big question is when? The U.S. economy is doing well, but the global economy isn’t. To ensure U.S. growth gains sustainable traction, I predict the Federal Reserve will wait until the second half of 2015 to raise rates. My colleague and fellow Profit Confidential writer Moe Zulfiqar maintains the Federal Reserve will begin to raise interest rates in March 2015. Time will tell.
No matter when it begins to make the move, the Federal Reserve will not raise interest rates with reckless abandon. Investors and borrowers can look forward to small, gradual—very gradual—increases. In all likelihood, the Federal Reserve will keep short-term interest rates below two percent until at least late 2016. It has been suggested that interest rates could even remain low beyond 2020.

Courtesy Profit Confidential, a daily publication for Lombardi Financial customers.  (EconMatters author archive Here)  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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