Gordon Pape is a well known investing and personal finance guru and author, 2009Tory Zimmerman/The Globe and Mail
Until recently, my outlook for 2015 was optimistic.
However, last week's market gyrations, which saw the TSX lose 379 points, was just a preview of what's in store for 2015. This is shaping up as a year of uncertainty, a condition that sends investors running for cover.
Just a few weeks ago, the prospects for 2015 looked pretty good. The U.S. economy was in a strong recovery mode, and accelerating. The S&P 500, the Dow, and the TSX had all set record highs. And history is on our side. Over the past 15 years, the performance of the Dow on the first day of January trading was a predictor of how the year would turn out 80 per cent of the time. On Jan. 2, the Dow registered a small gain of about 10 points. Not a lot, but at least it was up.
In addition, this is the third year of a presidential term, which has historically been very good for stock markets. Barron's recently published an analysis of third-year results that showed that since 1896 the stock market has risen 82 per cent of the time with an average gain of 15 per cent per year. Since 1940, the Dow has risen in every single third year of a term – never missed once! The average annual gain was 22.3 per cent.
This time, however, may be different.
It's not just oil that has investors worried and analysts scratching their heads. Add interest rate uncertainty to the mix and then stir in a dose of European angst and we have a toxic brew that does not bode well for stocks, at least in the short term, and which may prolong the seemingly ageless bond bull market.
Here are my best guesses as to what may transpire as 2015 takes shape.
Oil will drop further, then recover
The markets always overshoot, whether to the upside or the downside. The current drama unfolding in the energy sector looks like yet another example of this. The way the oil price has been plunging, you might get the impression that suddenly no one wants the stuff any more.
What we have right now is a combination of supply/demand imbalance complicated by speculative mania. That will sort itself out in the coming weeks. In the meantime, the price could well sink to the $40 range but I don't expect it to stay there for long. A rebound to the $60+ level is likely by spring followed by a lengthy period of consolidation which will give stock markets time to pause and stabilize.
New York will record modest gains Forget about the average 22.3 per cent gain in the Dow since 1940 in the third year of a presidential term. That's not in the cards for 2015. In fact, if it happened, I'd be worried. As of the end of 2014, the Dow was showing a five-year advance of over 70 per cent while the S&P 500 was up 85 per cent. Most analysts agree that the U.S. markets are no longer cheap, with few bargains to be found. To expect gains of 20 per cent+, or even in double digits, is simply unrealistic. I think the major U.S. indexes will finish the year in the black, but the gains will only be in the range of 5 per cent to 8 per cent. On that basis, my forecasts for year-end 2015 are:
S&P 500: 2,160 to 2,225
Dow Jones Industrial Average: 18,715 to 19,250
Nasdaq Composite: 4,970 to 5,115
Toronto will struggle
It's hard to be positive about the outlook for the TSX this year. Financials, the single largest sector with 35.7 per cent of total assets, gained 8.6 per cent in 2014 but recent statements from senior bank officials suggest that profit margins are tightening and we could see some retrenchment in 2015. The energy sector, which comprises 21.4 per cent of the index, is in turmoil. Materials, which make up 11 per cent of the S&P/TSX Composite, are in a prolonged slump. That's more than two-thirds of the index that is shaping up as a drag on returns. Even if industrials surge on the strength of increased exports due to a weak loonie, those stocks only represent 8.6 per cent of the total weighting. The TSX set an all-time record of 15,685.13 back in September. I don't think we'll see that again this year. A negative year is not out of the question.
Tough times overseas
Last year was one of relative calm in Europe. This year is starting off differently, with a looming election in Greece that could set in motion a series of events that would culminate in that country quitting the euro zone.
That, in turn, would lead to more uncertainty about the European economy and have a negative impact on markets. Sanctions against Russia, which hurt European exporters almost as much as they do the Russians, won't help.
Emerging market nations that are oil consumers will be given a boost by the price drop but producing countries will be hurt, none more so than Russia. There's nothing to indicate a quick turnaround in China's slowing growth pace. Brazil looks weak, although there are signs Mexico's prospects are improving. All in all, it looks like the rebound in emerging markets stocks has been put on hold for a while.
Interest rates will stay low
It's widely expected that interest rates will start to rise this year. Until recently, I thought so too. Now I'm not so sure. The collapse of oil prices is going to slow the rate of inflation growth, perhaps considerably, and may push Europe into deflation. On top of that, we're seeing another flight to safety as overseas investors pour money into U.S. Treasuries, knocking yields down and pushing prices higher. According to Yahoo Finance, yields on U.S. Treasuries dropped from an average of 2.3 per cent in December to 1.97 per cent last week. Any increase in rates by the Federal Reserve Board would serve to attract more hot money into the U.S., driving up the value of the greenback and putting a crimp in American exports. So don't be surprised if the Fed delays making any move until later in the year and perhaps not until 2016. As for the Bank of Canada, it's not likely to move before the Federal Reserve, particularly with the country's economic prospects now looking weaker.
Bonds will be positive
Uncertainty tends to be good news for bonds, especially government issues, which are seen as safe havens. Don't expect another 2014, which saw the FTSE TMX Universe Bond Index rise 8.8 per cent. But a combination of continued low interest rates and weak economic growth in Canada should translate into positive returns for investors in the 3 per cent to 4 per cent range.
The loonie will fall, then rebound
We may be number one in junior hockey but when it comes to our currency things are looking grim. The loonie slipped below $0.85 (U.S.) last week and we could see $0.80 if oil doesn't right itself soon. Since I believe oil will recover to the $60 range by spring, it follows that the loonie should rebound somewhat at that time, since traders see it as a petro-currency. Look for it to be back around $0.85 by year-end.
Gold will falter
Only dedicated gold bugs, which have been predicting the collapse of the world financial system for years, can find a good reason for investing in bullion. Unless you are a true believer, stay away. The fall in the oil price has had a ripple effect on all commodities and exacerbated deflationary concerns in Europe and Japan. Gold can't thrive in that kind of environment.
I am not pessimistic by nature. But this year is shaping up to be something of a dog's breakfast. I believe the overall outlook for the economy remains modestly positive but there is a lot of ambiguity in the short-term situation. That may mean some changes in your investment strategies for the coming year.
Gordon Pape