Sunday, January 11, 2015

Stock market outlook for 2015

To make a long story short, the stock market in general and NASDAQ in particular will face a lot of volatility in 2015. Maybe not as extreme is this first week of trading has been, but the same general pattern. The economic outlook for 2015 is fairly bright, but as uneven as the recovery has been over the past few years. Unfortunately, a lot of the economic brightness of 2015 has already been priced into many stocks. And the big concern is that the prospect of rising interest rates in the second half of the year could reduce the enthusiasm for even higher stock valuations. I think that concern is mostly misplaced, but I do have to acknowledge that the markets don't always follow my lead.

Hedge funds will remain in control of short-term market trends, just as we saw in 2014 with six major peaks, each followed by at least a partial or mini correction before continuing to advance.

We appear to be in the middle of a recovery from the mini correction off the peak of late December. In 2014 we had early peaks on January 22 and March 5.

On the one hand, it seems quite reasonable to expect new peaks on the same variable one to four month intervals that we saw in 2014. On the other hand, with stock valuations now a lot more lofty, we could see hedge funds make shorter runs up as well as more of the very brief corrections we saw in the last few months of 2014. Of course, we shouldn't bet too heavily that the stock market will ever be reasonable.

Stocks could get squirrelly later in the spring as we get closer to the time when the Fed is expected to stat raising interest rates, which could impact some dividend-paying stocks and hence stocks in general since anything that affects any of the stocks in a market index will have some effect on all stocks in that market index.

Although the first Fed rate hike is not likely until September, there will be a lot of chatter asserting that the Fed should start hiking rates in June. It will be a competition of voices, which will lead to plenty of volatility. My expectation is that the Fed will finally nail down the time frame and details of the first hike at their annual conference in Jackson Hole, Wyoming in late August. I believe that there is close to zero chance for a Fed rate hike before September.

Even a Fed rate of 0.75% by the end of the year is still too little to have any significant financial impact on most of the stock market. Still, a lot of confusing and conflicting chatter will likely whipsaw markets and give us at least a few short-term peaks and mini corrections throughout the year.

We could see a replay of the trading pattern of mid to late 1999, where people were seriously worried about how Y2K would play out when the calendar rolled over to 2000, but stocks climbed that wall of worry right through the end of the year. Liftoff and that jump to rates of 1.0 and higher can look awfully scary to a lot of people.

Will we see a major, full correction (more than just barely a 10% decline off a peak) in 2015? Sure, it's quite possible, but probably only if we have some equally unlikely major advance of more than 10%.

Will NASDAQ set a new all-time high above its dot-com peak? There is a good chance, since it would take only a 7.3% pop from the current level to hit the all-time closing peak of 5048. I won't give a specific target gain for NASDAQ for 2015, but 7 to 15% is certainly within the realm of reason. We could also see a new peak earlier in the year and then trend down and close the year below that dot-com peak. Anything is possible here.

There will also be plenty of rotation between groups of stocks and individual stocks as well. The leaders of 2014 are not so certain to be the leaders of 2015. Ditto for the laggards of 2014.

I am personally not expecting any specific trading pattern or any specific replay of any historic trading pattern, in large part because we really are in a whole new world here. Not that everything is rosy and wonderful, but that a lot of historical activity simply won't play out the same way is has in the past. As Mark Twain famously said, history doesn't repeat... it rhymes.

For my more detail on my Fed rate hike outlook for 2015:

For more color on how I feel Fed rate hikes will affect stocks:

In short, the bull market will likely continue through 2015, but with plenty of volatility to scare the faint of heart.

-- Jack Krupansky

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