Is This The Best Of All Possible Worlds?

by: Dana Blankenhorn


When everything is going well the bears warn it's about to end.

Longer-term positives for the economy are in place, however.

2015 will actually be the start of the next bull market.

As 2014 fades into 2015 bears have one last protection against a Dow (NYSEARCA:DIA) that's up 9.6% on the year and a NASDAQ (NASDAQ:NDAQ) composite up over 15%.

It can't get any better than this.

In some ways that's true. The Federal Reserve will have to raise short-term interest rates next year to keep the economy from overheating. The price of money will go up. The strong dollar is going to encourage imports and discourage exports. The drop in oil experienced in the second half of the year can't be repeated.

Then add the problems the rest of the world is going through. Japan may have endorsed Abenomics again, but it's still not getting results from it. Europe faces new pressures to break-up from the Greek election and rising nationalism across the continent. Latin America has rejected Wall Street warnings to turn back from its faith in left-wing politics. Africa has Ebola to worry about, and Vladimir Putin might decide "après moi, le deluge" at any moment. China looks more Communist than ever, choking off the Gmail e-mail client, and U.S policy will be stuck at gridlock for at least two years.

But underneath all this I see plenty of reasons to be excited about the coming year.

  1. Oil's resurgence will improve the outlook for renewable fuels, especially efficiency, which benefits companies like General Electric (NYSE:GE). Solar costs will continue to decline, benefiting companies like SunPower (NASDAQ:SPWR). Energy will gain some of what it lost, not all but enough to mean a higher price for Pioneer Natural Resources (NYSE:PXD) next December than now.
  2. Technology is replacing oil at the center of the U.S. economy and of our politics. Moore's Law is replacing the oil pits at the center of economic life. This may be the year the "Larry Page Primary" (NASDAQ:GOOG) (NASDAQ:GOOGL) replaces the "Rupert Murdoch Primary" (NASDAQ:NWS) at the heart of our politics. Those not engaged directly in the primary, like Facebook (NASDAQ:FB) and Amazon.Com (NASDAQ:AMZN), will probably see stronger gains as a result. Politics is distracting.
  3. The movement of people and value toward innovative research centers and away from suburban office parks will continue, benefiting real estate companies, which you can buy through instruments like the Dow Jones All REIT Total Return Index (REIT).
  4. The U.S. budget deficit is almost certain to keep going down from last year's $483 billion, as health reform bites down on costs and costs for unemployment drop. Deficits are now running at barely 4% of GDP, and should reach historical norms this year. This could see yields at the end of the year at closer to 2.5% than 3% on the 10-year. That's still a loss, but not nearly the size of what the market's bears are predicting.
  5. Unemployment is going to keep falling, as baby boomers retire and pressure to raise wages becomes unbearable. This will provide the stimulus of a larger market, the one ingredient missing from the current recovery. Consumer stocks like Disney (NYSE:DIS) will benefit, as will automakers like Fiat Chrysler (NYSE:FCAU), up 32% already from its October debut.

The real word for 2015 is stability. I expect stable domestic policies. I expect positive U.S. economic trends to continue. Energy prices will rise, from the current low base, buoying all stocks in the sector. If the economy were a game of poker, and we were playing against all our economic frenemies, you would want to be holding our hand.

That said, the best bargains on the board for 2015 are likely to be foreign shares. The dollar's strength means you can buy a lot of them cheaply right now, although I prefer to keep such investments in broad-based mutual funds like the Vanguard International Growth Fund (MUTF:VWIGX). The problems described at the start of this story show that, while things can't get much better here they can hardly get much worse there, although it's usually at this point in the Europe story that the super-bears come out to prowl, predicting World War III.

If those super-bears are right, of course, it doesn't matter what you buy - we're all in the fire. That's why I ignore them. It may be true that in the long run we're all dead, but 2015 is the short run.

Disclosure: The author is long GOOG, GOOGL, GE, AMZN, DIS, VWIGX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.