So far, 2015 has proven to be an unusual year. The stock market has gone virtually nowhere in 12 months, bonds yields are actually well off their highs for the year despite a looming rate hike from the Federal Reserve, and crude oil prices have fallen at a pace last seen during the 2008 meltdown.
The market will continue to keep us all guessing. That’s what markets do best.
But I’m going to hazard 10 predictions for the remainder of 2015 covering everything from crude oil prices to the Spanish unemployment rate and everything in between.
Some of these are contrarian calls well outside of the mainstream. But as 2015 has trained us to expect the unexpected, I believe them to be the right calls.
1. The Fed Raises Rates Once…and Then Stops. This has been the most telegraphed Fed tightening in history. In fact, you could argue it started more than two years ago, in May of 2013, when Ben Bernanke, then the Fed Chair, first started making noise about tapering his quantitative easing program. And, once quantitative easing was tapered out of existence, it was only a matter of time before the focus shifted to “liftoff” from the zero-interest-rate policy (“ZIRP”) that has been in place since the dark days of the financial crisis.
Fed Chair Janet Yellen has been talking the good talk about raising the Fed Funds rate for most of 2015, so none of us can act surprised when she finally does it either next month or in December.
But, here’s the thing: She waited too long. It has been more than six years since the last recession. In the entire span of U.S. history since the Great Depression, the longest stretch we’ve ever gone without a recession was 10 years (opens in new tab) — and that was during the 1990s tech boom. Since the Great Depression, the average time between recessions was four years and nine months.
So, while this doesn’t mean a recession is necessarily around the corner, we’re certainly due for a slowdown, and a lot of the economic data of the past few months has been tepid at best. GDP growth is sluggish, and inflation is dead on arrival. None of this is a recipe for aggressive Fed rate hiking.
The Fed really wants to raise rates. They want to give themselves room to lower rates next time we have a recession. But they don’t want to cause a recession in the process, so I expect a rate hike of no more than 0.25% to 0.50%, making this the shortest tightening cycle in history.
2. Bond Yields Finish the Year Lower. This is a contrarian view, to say the least. “Everyone” expects bond yields to rise through the remainder of this year and beyond. But falling yields are consistent with my view that the U.S. economy is due for a cooling. Our current economic expansion, which has been aided by the most aggressive central bank action in history, is looking long in the tooth. Yet, it never quite gathered enough speed to give us strong growth or to ignite the inflation the Fed was hoping to see.
Inflation is the single biggest worry for the bond market. Rising inflation means rising bond yields…and falling bond prices.
Well, the most recent 12-month consumer price inflation figures showed inflation of just 0.1%. Excluding food and energy, it was a more respectable 1.8%. But that’s still below the Fed’s target of 2.0%.
Until we see a sustained uptick in inflation, we’re not likely to see bond yields go much higher. But there are other factors at play, too. With the aging of the Baby Boomers, the hunt for yield, which has been a theme now for over a decade, is only going to intensify. And lower yields in Europe and Japan will put an anchor of sorts on U.S. bond yields.
And finally, there is precedent. Following its spectacular bubble and bust in the early 1990s, Japanese bond yields continued to drift lower--for 20 years and counting. So, anyone who tells you that bond yields “can’t go lower” or “can’t stay this low for long” clearly has never bothered to read a history book.
3. The REIT Rally Gathers Steam. Real estate investment trusts (usually referred to as REITs) have come to be viewed as bond substitutes over the last decade. REITs are excluded from paying federal income tax so long as they distribute 90% of their profits as dividends. That fact makes REITs excellent long-term income vehicles, though it also makes them very sensitive to interest rate moves.
Because REITs dish out virtually all of their income as dividends, they keep very little on hand to make new acquisitions. This means that REITs are always having to go to the capital markets for new debt and equity. Rising market rates mean rising borrowing costs, which crimp REIT profits.
In a world with 2% bond yields, a 3% REIT looks like a steal by comparison. But if the bond yield rises to 3%, a REIT investor needs to see a yield of, say, 4% or higher to make the investment worth their while. So, rising bond yields make REITs less attractive.
REITs have spent most of 2015 in freefall as investors are pricing in the worst. Some REITs are down more than 20% in 2015, due almost exclusively to fears of rising bond yields.
But if I’m right about bond yields falling rather than rising, then REITs are an absolute steal at today’s prices. And, in fact, REITs have spent most of the past six weeks quietly rallying. Between now and the end of 2015, I expect REIT investors to see very nice returns between the high dividends and the potential for capital gains.
4. Oil Finds a Bottom. This year has been absolutely brutal for anyone with a position in crude oil. Over the past 12 months, the price of crude oil has been more than cut in half. It’s a perfect storm: Massive new supply coming out of the United States and Canada at a time when demand is waning from a slowing China and years of energy efficiency gains.
The market is practically sloshing with excess crude oil. It’s bad out there in the oil patch, to say the least.
But here’s the thing: Supply gluts don’t last forever, and markets tend to overreact to recent information. I don’t know at what price crude oil will eventually find its bottom. West Texas Intermediate might bottom out today, in the low $40s (opens in new tab). Or it may very well drop another $20. Only time will tell. But low prices push less competitive producers out of business and spur new demand. Already, Americans have responded to lower oil prices by buying bigger trucks and SUVs.
Although I can’t tell you the exact date and price at which crude oil will find a bottom, I expect it will be a lot sooner than most people seem to think. I’m betting that will be between now and the end of 2015.
5. Midstream MLPs Finish the Year Strong. Because of plunging crude oil prices, virtually everything even tangentially related to oil has gotten clobbered, including midstream pipeline Master Limited Partnerships (better known as MLPs).
Midstream MLPs are unaffected by energy prices, as their revenues are determined by the volume of oil and gas passing through their pipelines and not their prices.
Well, that’s the theory, anyway. The reality is a little more complicated. Most of the larger MLPs have multiple business lines, some of which do indeed have sensitivity to energy prices. And in some cases, the contracted pricing that midstream MLPs receive is directly tied to the price.But here’s the thing. These are the exceptions and not the rule. The larger midstream MLPs that investors are likely to own, such as Enterprise Products Partners (EPD (opens in new tab)) or Kinder Morgan (KMI (opens in new tab)), get the vast majority of their earnings from operations that are not affected by energy prices. Sure, the weakness in their other business lines might slightly reduce distribution growth over the coming years. But if so, it would only be by a modest amount.
Most of the large midstream MLPs have claimed in their earnings announcements that their distributions are safe for the foreseeable future, and most still expect healthy distribution growth over the next several years.
Once this wave of panic selling passes, expect MLPs to enjoy a massive rally throughout the remainder of 2015. Prices and yields this attractive don’t stay available forever.
6. Apple Gets Its Mojo Back. Apple (AAPL (opens in new tab)) has long been the company that could do no wrong. It had a talent for creating demand for products that had never existed until Apple invented them. From the launch of the original iPod until today, Apple has been one of the greatest growth stories in the history of capitalism.
Alas, in the world of investing, the question always becomes “What have you done for me lately?” And right now, Apple is a victim of its own success.
Sales of the iPhone 6 and 6 Plus absolutely crushed all expectations, giving Apple a massive windfall in the first half of this year. But the Apple Watch hasn’t quite lived up to the hype, there are fears that a China slowdown with crimp growth, and the market seems to be realizing what should have been obvious from the beginning: The torrid pace of iPhone 6 sales isn’t sustainable. There was a massive one-off upgrade rush from Apple fans that had been craving a larger screen.
And guess what. At today’s prices, none of this matters. Despite being the largest company in the world by market cap, Apple is one of the cheapest large companies in the world. It trades at a forward P/E of just 12. Stripping out Apple’s gargantuan cash hoard, you get down to a single-digit P/E valuation…for Apple, the most profitable company in the world.
As I wrote recently (opens in new tab), Apple has enough cash in the bank to sustain its dividend at current levels for more than a decade, without earning a single dime in additional profit. I agree with Carl Icahn (opens in new tab). Apple is worth at least $240 per share (opens in new tab), more than double today’s price.
7. European Stocks Blow American Stocks Out of the Water. I’ve made no secret of my preference for European stocks at today’s prices. While U.S. stocks are priced to deliver flattish returns over the next several years, many European markets are priced to deliver healthy returns of 7% or more.
After the worst of the crisis had passed by early 2009, it’s been mostly smooth sailing for the U.S. markets. But Europe has had a very different experience. Shortly after the 2008-2009 crisis had passed, Europe had a secondary sovereign debt crisis. As Greece, Ireland, Portugal and even Italy and Spain looked as if they were headed for possible default or an exit from the Eurozone, the survival of the European project seemed at risk. Most European markets continued to suffer in bear market conditions long after the U.S. had entered one of its greatest bull markets in history.
Now, three years after ECB President Mario Draghi promised to do “whatever it takes” to save the eurozone, investors are starting to view Europe as a viable investment destination again. With European markets very attractively priced, at least in relation to the U.S. market, I expect European markets to outperform for the remainder of 2015.
8. Spain’s Unemployment Rate Finally Dips Below 20%. Fantastic news. Spain’s unemployment rate dropped to “only” 22.4% last quarter (opens in new tab), down from 23.8% in the first quarter. It was as high as 26.9% in 2013.
Those numbers are hard for Americans to wrap their minds around. The last time we had unemployment rates anywhere close to that high was during the Great Depression.
But here’s the thing: Spain always has high unemployment. Even during economic booms. It’s average unemployment rate since 1976 has been 16.4%. Even during the go-go years of the mid-2000s, one of the greatest growth booms in Spanish history, the unemployment rate barely fell below 8% — a level that would be considered a crisis here in the United States.
The situation in Spain is never quite as bad as it looks. A lot of the “unemployed” are actually employed in service sector or in the informal economy but get counted as “unemployed” due to quirks in the way Spain tallies the data.
In any event, Spain is quietly growing and is expected to see GDP growth of 3.3% in 2015. That should help to bring Spanish unemployment a little closer to its historic averages.
9. Chinese Stocks Drift Lower. It’s hard to have a proper bear market when you’re not legally allowed to sell your shares. But that is the situation in China today. In trying to avert a stock market collapse, the Chinese authorities have put major restrictions on short selling (opens in new tab). Earlier this summer, the regulators halted trading by large shareholders for six months. At one point, so many restrictions were in place that only 3% of Chinese stocks (opens in new tab) were actually able to trade.
Perhaps not surprisingly, the bear market conditions have abated slightly. Stock prices can’t really fall when you’re not allowed to sell them.
But the bear market in Chinese stocks is far from over because confidence has been forcefully undermined. No one in their right mind would buy a stock they would then be unable to sell. So, bottom line, don’t expect the bull market in Chinese stocks to resume any time in 2015. Investors burned by the selloff aren’t likely to come back for more anytime soon.
10. Russia Comes in From the Cold and Embraces the West. Just kidding. I wanted to see if you’re still paying attention. The Russian bear has most assuredly not grown cuddlier in recent months, and I don’t see this happening any time in 2015.
In early August, the bear growled loudly. On the anniversary of the Western sanctions that were put into place after the annexation of Crimea, Russia made a very public statement by bulldozing a massive pile of European cheese (opens in new tab).
And it didn’t stop with a War on Cheese. Polish apples and tomatoes were next to feel the wrath of Russian president Vladimir Putin. So far, 28 metric tons of Polish apples and tomatoes have been destroyed.
I’m assuming that Mr. Putin has a shred of decency and won’t allow for the wanton destruction of perfectly good German beer or Spanish ham.
It was low energy prices that contributed to the eventual fall of the Soviet Union, and it may well be low energy prices that take down Putin’s nationalist regime. But I most certainly don’t see that happening in 2015.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights (opens in new tab) blog.
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.
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