With
2014 winding down, now would be a convenient time to discuss the prospects for the
financial market and economy in 2015.
Year
2014 was in some respects a tumultuous year; from the slowdown in Europe and
China to the collapse in oil and ag commodity prices, the deflationary
undercurrents of the 60-year cycle was apparent this year. The long-awaited bottom of the 120-year cycle
of deflation was finally made in October, and aside from some residual weakness
still evident, the cycle bottom was a successful one.
With
the lifting of the deflationary cycle, year 2015 promises to be a much stronger
one than last year. The birth of a new
long-term cycle will mean slow, steady re-introduction of inflation into the
economy. More to the point, the next few
years should witness gradual re-inflation.
The runaway inflation that some analysts are wary of is still many years
away. By the same token, the recent
fears of many economists of a deflationary collapse are misguided. Deflation will gradually cease to be a
persistent problem in 2015 and beyond as commodity prices should stabilize next
year and consumer finances should continue to see improvement.
Year
2015 is also of course a “Five Year” which is the most reliably bullish year of
any given decade. Going back to the
previous 120-year cycle bottom of 1894, there has never been a bear market in
the Five Year. One reason for this is
because the 10-year cycle – a component of the 120-year long-term cycle –
always bottoms at the end of the Four Year.
The 10-year cycle is the primary long-term directional cycle within any
given decade. Thus with a fresh new
10-year cycle underway in 2015 the odds favor a good year ahead for
equities.
Fortunately
for stock investors, most major indices are in a good position heading into
2015. The major indices are above their
key longer-term trend lines, namely the 30-week and 60-week moving averages. Stocks have built up a good head of steam and
are therefore primed to enjoy an overall bullish year ahead thanks to the
release of upward pressure from the newly formed long-term Kress cycles.
One
of the factors which kept many retail traders from participating in the stock
market in 2014 was the lack of a clear directional bias in small cap
stocks. The 1-year graph of the Russell
2000 Small Cap Index (RUT) below perfectly illustrates the frustration that
small investors experienced this year.
A
truism of investor psychology is that prolonged sideways movement in equity
prices does more to discourage small investors than anything else. Indeed, a lateral trading range does more to
discourage investors from investing than a major market collapse has ever
done.
Will
the small investor return to the stock market in 2015? This is very much an open-ended question and
one that defies an easy answer. It can
be stated with some degree of confidence, however, that the lateral trading range
in the small cap stocks will likely be resolves in 2015. This will do much to attract some sideline
money in the year ahead, though whether the anticipated breakout in the small
caps is enough to shake the average retail investor from his reticence is
debatable.
My
guess is that small investors will remain out of action in 2015. Many are still stinging from the 2008 market
collapse and are too gun shy to invest in equities. Others view the heights achieved by stocks in
the last few years as untenably high and therefore vulnerable to a major
decline. Their collective reluctance to
return to the stock market will, however, limit their options for growing their
capital in the year ahead. Instead, many
will elect to remain in low-yielding bonds and other underperforming assets.
Another
big concern for investors heading into 2015 is the state of the U.S.
economy. Much has been made over the
improvement in consumer confidence this year, yet consumer spending hasn’t been
as powerful as the confidence levels would suggest. A better reflection of what the average
consumer is doing with his money is visible in the New Economy Index
(NEI). NEI is a basket average of
several stocks within the consumer retail and business sectors. For years it has provided an accurate
real-time picture of the overall state of the U.S. retail economy. Here’s what the NEI looks like right now.
NEI
reached an all-time high last January and has spent the bulk of 2014
consolidating in a lateral range. The
NEI chart looks good but not great, and there’s definitely room for
improvement. My interpretation of the
NEI pattern is that consumers are still spending at above-average levels but
haven’t completely “let loose” with those ever-increasing spending binges that
characterize strong economies.
Although
joblessness isn’t a major problem like it was in years past, consumers are
apparently concerned enough about keeping their jobs that they haven’t
accelerated their spending. That may
change as we head further into 2015, especially if the financial market outlook
shows continued improvement.
