2014 -- 52 -- 2015 Outlook 01

As we near the beginning of 2015, the U.S. stock market is at a very interesting juncture. Just like the end of 2013, it will finish at or near the high for the year. It is very unusual for the stock market to finish at its highs in consecutive years.

On the surface, as well as analytically, there is no tangible reason to believe that the stock market will not continue to rise. The market is still being propelled by the lack of reasonable alternatives for investors. Low interest rates and a sluggish real estate market encourage money to go into the stock market. While the broad U.S. economy is still weak for a recovery, public companies overall have fared much better than many small businesses since the Great Recession, and they continue to produce good earnings.

The stock market is ultimately being driven by the easy money policies of the Federal Reserve. Those policies are the result of two things – the lack of inflationary pressures due to the weak economic recovery, and concerns about the weak world economy. Bottom line: the Fed will not raise U.S. interest rates until economic growth in the U.S. and around the world is much stronger and inflation, not deflation, becomes a concern. As long as there is a strong threat of recessions and deflation for Europe, Russia, and other counties, the Fed will not raise interest rates.

The nearly 50% reduction in oil prices is strongly beneficial to the U.S. and non-energy producing economies in the short term. However, the speed of the drop has been a severe shock to the economies and currencies of countries such as Russia and other oil producers. If low oil prices are sustained, or the rapid drop continues, it could precipitate loan defaults and a banking crisis. Also, Russia with a bad economy is a much bigger threat to world peace than Russia with a good economy.

So, while my head says the stock market should continue to be strong in 2015, my forty years of watching the markets – as well as my gut – tell me to be cautious. Besides oil, the prices of many other commodities and natural resources declined in 2014 and continue to decline. The continued lack of inflation suggests that there is a real threat of deflation in many countries. And deflation is the fuel that made the Great Depression catastrophic for the world.

Two other issues threaten the prosperity of long term investors in the stock market. Both of these are long term issues that will shape our nation and the world for many years. These issues are the social unrest and violence that will continue to grow as a result of Islamic terrorism and the racial unrest triggered by Obama’s encouragement of class warfare in the U.S.

We will have violence in the streets of most large U.S. cities in 2015 and it will get progressively worse and more widespread. The underlying issues fueling these protests are not limited to police shooting blacks. Ultimately, the real issues are economic. And, unfortunately, there are no easy solutions to the problem of unemployable men in U.S. cities and the ease at which many black young men engage in a violent lifestyle. Providing better education and work opportunities for minority young men is the final answer to these issues. Yet, the reality is that despite billions of dollars being thrown at these issues since I was a child, the situation continues to get worse.

With regard to Islamic terrorism, I have been surprised that we have not had a major terror event in the U.S. in the last year. We are likely to soon see Islamic terrorist events initiated by misled U.S. citizens who have been duped into following the radical ideas of ISIS and other barbarian groups. The un-predictability and local nature of these actions will rattle our sense of security and safety.

On the positive side, the November election results have given hope that the anti-business actions of the Obama administration to over-regulate and squelch business activity will come to an end no later than 2018. My sense is that the recent stock market rally has been overdone because investors naively think that Obama will work better with the new Republican congress in 2015. Unfortunately, it is highly unlikely that Obama will do anything to work with Congress or help businesses. Based on his view that he alone knows what the U.S. needs, he will veto every initiative passed by the new Congress unless it fits his views. This means very little – or even nothing – will get done to improve business in 2015.

In addition, the really nasty part of Obamacare finally takes effect in 2015. The elements of the program that begin in 2015 contain all the costs and regulatory interference – two years after the supposed benefits took effect. I hope everyone enjoyed the benefits of Obamacare, because now we get to experience the costs!

In conclusion, I expect that the “No Alternatives” stock market is still the best place for your money until one of the following happen:

  1. We have a major terrorism incident in the U.S. The risk to the markets is especially high if the event affects technology or the way in which basic services are delivered in the U.S.
  2. Russia initiates either additional imperialist actions or its economic problems cause a banking crisis.
  3. Europe slips into a deflationary recession.
  4. Rioting in the U.S. impacts the U.S. economy by causing a crisis in confidence or impacting U.S. productivity.
  5. Obamacare and other anti-business actions from Obama cause the economy to stall.

How will you know that it is time to get out of the market? When the market reacts sharply to one of these crises or a new one, or when things are going so well that the Fed starts raising interest rates.

In other words, if the current environment of low interest rates, a not too strong recovery, weak but growing European economies and no serious world or domestic crises continues, then the stock market will continue to grind its way upward.

However, the longer the current environment continues, the higher the risk of economic disruption and a market decline.

Until such a change occurs, interest rates will remain low, but hopefully not go below zero. While oil prices will likely continue lower for a while, they will rise again, probably to at least the 70-80 level by the end of 2015. Commodity prices should rebound in the second half of 2015 after significant declines in 2014. Stock prices in Europe and around the world will continue to lag the U.S. until those economies improve.

Bottom line: a good 2015. But, if there are surprises, all bets are off!