David Fuller's view

I have mentioned seasonal factors recently, but I defer to Stock Trader’s Almanac for the accurate historic data over many decades.  While there are logical seasonal factors for Wall Street and some other markets, these also need to be compared to the current environment, which may or may not always be conducive to an approximate repetition of the historic data. 

For instance, seasonal factors aside, does Wall Street’s bull market of nearly 6-years increase or decrease the likelihood of a 7^th consecutive positive year?  Similarly, should Wall Street’s somewhat elevated valuations, not least relative to most other stock markets, be a positive or negative factor in today’s calculations?  In other words, are US stock market valuations likely to expand further or contract from current levels?  Is the potential for US corporate earnings strengthening sufficiently to match a rising stock market?  Does the end of QE and the prospect somewhat higher short-term interest rates in 2015 increase or decrease bullish prospects?  Is crude oil below $60 a barrel a net positive or negative factor for stock market indices?  Is US national governance a headwind or tailwind for Wall Street?  Similarly, are global geopolitical events in 2015 more likely to be a positive or negative influence? 

You may have noticed that there is no unanimity on many of these points and others which may support or inhibit these seasonal factors cited by Jeffery Hirsch of the Stock trader’s Almanac, quoted by Jim Brown:

“Jeffery Hirsch of the Stock Trader's Almanac pointed out that seasonal trends are pretty bullish for 2015. It is a pre-presidential election year and the best year in the 4-year cycle. Since 1939 the third year is up an average of 16.0% for the Dow and 16.3% for the S&P. Since 1971 the Nasdaq has averaged a 30.9% gain in year three. It is also the fifth year of the decade and there has only been one losing year in the last 13 decades. Years ending in ‘5’ average 28.3% gain for the Dow since 1885 with the S&P averaging 25.3% since 1935 and the Nasdaq averaging 25.6% since 1975. The best three quarters in the four year cycle are Q4 of year two and Q1-Q2 of year three which we are heading into next Friday. “

This is an outstanding track record for the third year in the US Presidential cycle.  However, the following valuations for US stock market indices, according to Bloomberg – Russell 2000 p/e 20.72 yield 1.31%, Nasdaq Composite p/e 47.42 yield 1.26%, Nasdaq 100 p/e 24.73 yield 1.25%, S&P 500 p/e 18.52 yield 1.91%, DJIA p/e 16.13 yield 2.15%, and Transports p/e 21.35 yield 1.05% - are too high to suggest outperformance relative to the historic averages above.

Nevertheless, the performances of these indices remains impressive, not least the recovery and new highs by the Russell 2000, which is obviously no longer a stressed ‘canary in the coalmine’.  

Yes, some of these gains are vertigo inducing but the first half of the 2015 should be favourable, particularly after these strong yearend gains are consolidated, probably in January.  Nevertheless, the staircase step uptrends for the better performers are reassuring, and less worrying than parabolic accelerations. 

The biggest known geopolitical risk for stock markets, particularly those in Europe, will be Russia.  A nuclear power with a failing economy run by a dangerous, insecure dictator with a cold war mentality is far from reassuring.  Unfortunately, Putin is not someone who knows that it is time to go, let alone realise that he can best serve his country by handing the reins of power over to someone who is responsible.  We can hope but it is not in the nature of dictators to choose that route. 

Most strategists are expecting a volatile environment in 2015, based on what they saw during the first half of both October and December.  We should be aware of this risk and it is generally better to buy on dips within overall uptrends and lighten on overextended rallies. 

I maintain the prospects for stock market investors in 2015 are reasonable, and if Wall Street does well, some other stock markets will outperform, just as we saw this year.  The winning combinations will most likely include clear evidence of good governance and reasonable valuations.