Barely a month into the new year, one of my market predictions has born out so far – lot’s 0f market volatility! It certainly has been a daily roller coaster ride. However, it remains to be seen if my much bolder prediction of maybe an 8% rise in the S&P 500 might still work out. Whether it does or not… will NOT effect my clients however.
You might be interested to know that the US stock market has now had 6 years of positive gains. (2009-2014). However, going back over 100 years, there has never been 7 years in a row of “up” markets. In fact, there has only been one other time in history with 6 gains in a row. And the 7th year (1905) was down -18%.
As usual, there are many things both pushing and pulling the market in opposite directions. On one hand, the drop in the price of a barrel of oil from over $100 down into the $46 range should provide a big boost to the consumer… and it is. However, virtually all of the job growth in America has come from the oil sector over the last 4-5 years and that job growth has not only stopped in its tracks, but layoffs are now a headwind to the unemployment rate and wage growth.
Not only that, but the energy patch plays a big role in the S&P 500’s earnings. With profits down from the oil sector, there will be much less earnings growth in the overall index which will hurt the total index’s P/E.
The other major drag on the potential growth of the S&P 500 index is the strength of the US Dollar. This makes our exported goods more expensive overseas which hurts our competitiveness with local companies. The strong dollar also means lower profits when the US companies turn those weak local currencies back into US dollars.
But like everything else, there is two sides to the currency situation. Since we import many goods from overseas, the stronger dollar makes those imports less expensive for American consumers – keeping inflation low. That will likely keep interest rates low which is great for borrowers but it stinks for savers.
Yes, savers are suffering too. Today the 30 year US Treasury bond yield fell to its lowest point in the postwar era – only 2.29% for a 30 year rate. The yield on short-term government bonds of Switzerland, Belgium, Denmark, France, Germany, Japan, and the Netherlands are all sub-zero. That means you have to PAY the bank money to keep your cash there!
So where does all of this leave you, as an investor? I keep coming back to the 3 buckets of risk. If you get that right, everything else will fall into place. It is the concept that is the foundation of a retirement plan that will allow you to sleep at night – whatever is happening in the markets.
If you haven’t see my 60 second video which briefly explains this you can watch it here: http://youtu.be/ZnkNHCwNsBc
If you want more information about the 3 buckets of risk, I wrote a short report a while back that I’d be happy to email you. Simply request your free copy by replying to this message.
all the best… Mark