Thursday, October 30, 2014

My Stock Market Crystal Ball Sees Double Digit Percentage Gains Ahead ... I May Be Wrong But So What? ... It's Fun Making Predictions

After the Federal Reserve met yesterday, it confirmed its view that the U.S. economic recovery continues to strengthen, albeit at a slower than normal historical pace, and that inflation is simply not a concern. For those reasons and more, we can expect interest rates to remain low for at least another year, even though the Fed has finally decided to end its historically unique bond-buying program.

Taken as a whole, the Fed's decisions yesterday were not surprising. The U.S. economy is now growing steadily and sufficiently to provide much needed jobs and continue to reduce unemployment over time. See Fed Ends Bond Buys, Sticks to 'Considerable Time' on Rates.

While nobody, including the Fed, knows precisely what will happen to the U.S. economy and its growth rate in the future, it is highly likely that we will witness ~3% annualized growth during the rest of 2014 and 2015 as well.

With some considerable conviction, I believe that stock prices will rise over that timeframe as well.  So while many market 'experts' will continue to debate on a daily basis not if but exactly when the inevitable 'correction' and downturn in stock prices will occur, my investment strategy is not based on that outcome either for the rest of 2014 or the beginning months of 2015.

Although prices will likely remain highly volatile and may fall during the next few days or even weeks, my personal crystal ball says that stocks (including dividends) will likely rise by this year's end and by a total of 10% and perhaps as much as 15% over the next 18 months or so. But how do I know that prices will rise at all, let alone by 10% or 15%, between now and the end of 2015? I don't know, of course. But that's where I see things headed, and that's how I'm investing my own money --- not in bonds and not in cash, but in the stocks of high quality companies.

So now that I've revealed to you (with total humility, I might add) what my crystal ball says, let's look at why anyone's market predictions, including mine, should always be greeted with more than a healthy dose of skepticism.

The Timeless Allure of Stock-Market Timers is subtitled 'Many investors know better than to rely on bold market forecasts. But they can't turn away.' Here's a sampling of the insightful article's contents:

"Twelve days ago, as the broader U.S. stock market was in the midst of its first sharp decline in years, popular newsletter editor Dennis Gartman appeared on a CNBC show and advised viewers to prepare for a bear market.
“You stay in cash and you stay in short-term bonds and you don’t move out,” Gartman advised viewers before adding “this is the start of a bear market, and it could last for several more months I’m afraid.”
But stocks quickly turned around and began to move toward the heights last seen in September. A chastened Gartman admitted late last week on another CNBC show that his bear-market call was all wrong. However, he’s still not willing to go long, instead maintaining a “neutral” position on the market as a whole, according to a report on Gartman’s rapid change of heart.
Asked by CNBC what he missed about the current character of the market, he replied “I’m not sure what I missed. I really don’t know…. I’ve never seen anything like the last two weeks.”. . .
But it would be wrong to just pick on Gartman. He is just one of a long list of market pundits who attempt to do what many respected investment minds argue is impossible—predict with some degree of confidence where stocks as a whole are heading and then often recommend a sharp shift in one’s asset allocation to play a bull or bear scenario. . . .
Market timers will often use stock charts, fundamental analysis, or economic trends to divine where stocks are heading in the coming months. . . . Even Jim Cramer, a popular pundit with CNBC and TheStreet known mostly for individual stock predictions, will occasionally make broad market timing calls.
But many seasoned investors, including Warren Buffett, argue that it’s a big mistake to shift radically in and out of stocks based on nothing more than an educated guess about what the future will bring. The future, after all, is a complex beast to behold, with an incalculable number of shifting variables. . . .
And financial news organizations from CNBC to print and digital news outlets are all too happy to give viewers and readers what they seem to want. Besides, if publications, Websites, and television networks simply told investors to buy and hold, with periodic rebalancing, it would be that much harder to fill pages and airtime. . . .

Only one in four . . . market timers succeeded in turning a small profit over the last five-and-a-half years and, therefore, beat a buy-and-hold strategy. . . .  
(One sage market follower simply says ) “The knock about market timing is that you have to get out at the right time and then get back in time near the bottom. . . . Even among those few who get out at the right time, they don’t get back in at the right time.”"
Summing Up

I'm in no way a short term oriented market timer, but instead essentially a long term buy and hold investor in individual blue chip, dividend growing stocks.

That said, I'm optimistic about the direction of the stock market in the short to intermediate term for several fundamental reasons. And the most important reason by far is that in the long haul stock prices rise. Accordingly, short term market moves will simply not impact whether or how I invest.

But in addition to my long held, long term optimistic view on stocks, several short term conditions favorable to the U.S. economy also cause me to be bullish right now.

Some of those reasons for optimism are the following: (1) the U.S. economy is steadily getting stronger; (2) jobs are growing and the unemployment problem is getting better; (3) inflation is not a concern; (4) interest rates are going to remain relatively low for the foreseeable future; (5) energy prices are low and going lower; (6)  the U.S. dollar will remain strong; and (7) imports and commodity prices will be lower.

Thus, while each and all of the above seven factors will contribute to higher consumer confidence and spending  levels, there is one more reason to be optimistic --- a new U.S. Congress is about to be elected, and this one can't be any worse than the one it will replace.

And there's more. As the single best place in the world to invest, the U.S. will continue to attract foreign buyers as our relatively higher interest rates (even though they will remain very low in an absolute sense) and general prosperity will cause the U.S. to be the best and safest place for investments.

And finally, in the short run, seasonal  factors like the annual year end stock market rally should help the cause.

So while admittedly I may be very wrong about all this short to medium term stock market forecast, I'm certainly not confused. Not even a little bit.

That's my take and my very fallible human and humble stock market forecast as well.

Thanks. Bob.

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