Every year we hear from a number of Wall Street prognosticators concerning the direction of the economy and stock market for the coming year.
In 2014, economist predicted that bond prices would fall and interest rates would spike up. The stock market would stumble. Oil prices would rise. The active managers that run mutual funds would outperform the unmanaged indexes.
In reality, long-term U.S. Treasury bonds earned nearly 26 percent for the year. The stock market as measured by the S&P 500 gained almost 15 percent including dividends. Oil prices fell to the mid $50 range for a barrel. The stock market stumble led to one of the largest two-day gains the market has ever experienced. The active managers who pick stocks for a living took their biggest shellacking relative to the market in decades.
According to "The Wall Street Journal" 48 out of 49 economists they surveyed got the 2014 forecast wrong. It wasn't just them. Portfolio managers and investment committees also were almost 100 percent incorrect. It's hard to get 100 percent consensus on anything.
This brings us to the 2015 forecast of the same experts. All of them, with the exception of one, paint a very rosy picture for the economy and the United States for this year.
Here are some of the major reasons for their optimism. Private sector jobs have risen by nearly 10 million jobs since bottoming in early 2010. The unemployment rate has
fallen below 6 percent. A number of headwinds that we have been facing are easing: an unprecedented contraction in state and local governments, a major housing correction and significantly tighter fiscal policy, and lackluster wage growth.
Since most of these prognosticators seem to almost always be incorrect in their reading of the tea leaves what is an investor to do?
Being a bit of a contrarian seems to make sense to me. It does not mean to sell everything and go to cash. Sitting on cash can get you nowhere fast. To me it does suggest caution. Remember the "Black Swan" scenario? Something totally unexpected happens that will negatively affect the markets. It would not be totally unexpected should Russia and/or Iran do something warlike to increase the price of oil, a move that could dramatically change the sunny forecast.
Here are a few suggestions. First, stay invested. Only a fool tries to time the market. It's never timing of the market that makes one successful it's time "in" the market.
Prefer stocks over bonds and cash, but be selective. Monetary policy remains supportive of equities. Be cautious of sectors of the market that are interest rate sensitive such as utilities. And yes, I know they had a great run in 2014. Look for sectors positioned to benefit from economic growth. Technology and even integrated oil companies that have recently cheapened. Also keep in mind that overseas stock markets offer some of the best bargains these days.
While there are a few bargains in bonds and the Fed is expected to raise rates by mid-year bonds are important sources of income. Continue to keep maturities short. Stick with individual bonds with fixed maturity dates over open ended mutual funds. Tax exempt municipal bonds are the most attractive area versus Treasuries and corporate bonds.
Stay diversified. It does not guarantee profits, nothing else does either, but diversification allows you to spread your risk among many investments that may respond differently to similar market conditions.
Resist the urge to exit the markets. Don't let the higher volatility expected this year or the rosy (contrarian) view chase you from investing in the market.
The past six years have given investors excellent returns. These returns were made when the future looked poor. Long-term investing, staying in the market at all times, is the winning strategy. Relying on annual forecasts is not.
Michael T. Doll, an investment adviser with the Longboat Key Financial Group, can be reached at 941-383-2300 ext 6 or Michaeltdoll@longboatkeyfinancial.com.