The Outlook For Stocks, Bonds, Gold, The Dollar and Real Estate
As we start 2015, many investors are pessimistic for a myriad of reasons. Not helping matters much has been the stock market’s uninspiring actions so far. We started the year with five straight down days, the first time that’s happened in over 20 years. I attribute the slow start simply to the pre-earnings nap period. Once this quarterly occurrence is over, I am optimistic for a number of reasons.
2015 should shape up to be a good year for investors, although with increased volatility and risk. Economic forecasts for the coming year are probably on the low side, as we witnessed last week with a monster 5% GDP growth rate for Q3. Earnings forecasts are too low as well. If earnings surprise to the upside as I expect, stock prices will go with them. The last 5 or 6 years we have had the most dramatic earnings growth increases in history and that trend will continue.
One of the main reasons has been the Fed’s low interest rate policy. Everybody was concerned that it would generate rapid inflation. However, we have seen the opposite occur with rapidly expanding deflation….two types in fact.
The first type of deflation is what I discussed in Facing Goliath – How to Triumph in the Dangerous Markets Ahead. This was created by the rapidly aging 90 million strong baby boomer generation. As they passed their peak spending years, they were replaced by only 65 million Generation X’ers. Hardly enough to replace their purchasing power, which is forcing prices for practically everything lower.
The other kind of deflation, the good kind, is being caused by the new American Industrial Revolution. Multiple revolutions in fact. We are in the midst of a revolution in technology, biotechnology and, of course, the headline grabbing energy sector.
Oil is plummeting from new and improved drilling technology that is finding ways to extract oil and gas from huge proven reserve fields that were once thought impossible. The US energy revolution is one of the biggest factors for America for the next 10 or 20 years. We turn from a net energy importer to an exporter. Cheap energy also has one tremendous side advantage…Peace in the Middle East. Imagine no more wars for oil and a shrinking defense budget. This would be hugely positive for risk assets such as stocks across the board!
This is all good news for you, me and the economy as a whole. Yes, some oil companies will suffer and some workers will lose their jobs, but the enormous benefit of thousands of dollars getting into the pockets of consumers as well as corporations saving tens of millions of dollars in production costs is staggering!
This massive deflation also creates cheap money forcing companies to buy back their own stock or other companies. There is currently over $3 trillion sitting in corporate cash right now earning absolutely nothing. This will reduce the number of shares and or boost earnings per share, all without creating new business.
All of this points to a good year for US Stocks but not gangbusters…nor will it be easy. The demographic headwind will be a major drag on the economy until approximately 2022. That’s when the 85 million Echo-boomers hit their peak spending years. Until then it’s still “Invest for need, not for greed”™! Risk management is paramount, especially if you are close to retirement or already enjoying your golden years. After that you’ll be able to buy anything again and make money.
Rates look like they are going even lower. Even though America is starting to rebound, the global slowdown will keeps rates at zero in Europe and Japan, forcing money into the U.S., which will keep rates low here. If you are a bond investor today, you are getting the royal shaft by not even keeping pace with inflation and getting back 60 to 80 cents worth of purchasing power at maturity for every dollar you invest.
Gold is an inflationary hedge, nothing more. With no inflation it will be going nowhere fast.
The US dollar will be a major story this year as it gets increasingly stronger due to the enormous Japanese and soon to be Euro stimulus programs. Printing money hurts your economy as we saw a few years ago. That tide has turned.
There is a long-term recovery in real estate underway, but the easy money has been made over the past few years, unless you live near Palo Alto. From here on, I expect a slow grind up until that demographic headwind turns to a tailwind in 2022.
Summary and investor strategy
This year as well as the next few will be good to those who are invested properly with a qualified retirement advisor and have a plan for the good times as well as the bad. The key as you get older is to manage risk properly because it becomes harder to replace this money…unless you don’t mind losing money and plan on working forever. If you are retired or close to it, “how much can I make” is replaced by “how much can I afford to lose” or “how much do I want to lose”. This will ensure you are looking at the big picture and getting the returns you “need,” but with the least risk possible, so you don’t get hurt to badly, or at all, when the market turns down again.
…… and that’s where we can help. To learn more about The Springer Investment Approach, which is our powerful proprietary Investment Management Strategy designed to manage risk and deliver returns in any market, or to get a free second opinion on your portfolio simply reply to this email or give us a call for a free consultation today.