Market Forecasts of 2014 and 2015 By: Gabriel PotterMBA, AIFA® 2015.01.01

Market Targets from January 2014

As a reminder, here were the 2014 S&P 500 targets which we presented a year ago.

Institution

S&P Forecast for 2014

Actual Ending Value, Dec 31 2014

2058

Credit Suisse

1960

Federated Investors

2100

Barclay's Capital

1900

Goldman Sachs

1900

JP Morgan

2075

Citigroup

1975

Morgan Stanley

2014

Bank of America / Merrill Lynch

2000

Oppenheimer

2014

Deutsche Bank

1850

BMO Capital

1900

RBC Capital Markets

1950

The average forecast predicted a rate of return of about 6.6%, with the S&P starting at 1848 and moving to a predicted average of 1970.  Actually, the closing value of the S&P 500 in 2014 was 2058; thus, the actual price return was 11.4%.  Once you factor in dividend payments, the total annual return of the S&P 500 was 13.69%

Revisiting the 2014 Predictions

2013 was the year where most analysts correctly predicted the economic fundamentals, but could not have foreseen the emotional, human, market reactions to those fundamentals.  This year, in contrast, almost nobody predicted the fundamental shifts which moved markets to all time highs.

Forecasts are estimates, but they aren’t primarily a function of futurists or guesswork.  Economic forecasts are only partially guided by the prognostications of market luminaries making their best guess, but rather, they are a function of historic performance and comparisons to measurable data.  What’s going on in the economy?  How are sales?  Are rents relatively affordable vs. houses?  How is price inflation?  How is wage growth?  And so on.

There are unpredictable forces – emotional, technological, geopolitical - which change the entire calculation (i.e. price multiple expansion in 2013, technological advancements like internet proliferation, or natural disasters), but the economic projections are largely inferred from historical data and trends.  Moreover, economic projections are constantly revised by banks and analysts to reflect new market levels and notable events.  If a notable market event occurs, there are two basic ways an analyst may approach the situation: either this event suggests a structural change - a new status quo - or the original status quo stands wherein we shall ultimately revert to our stable historical baseline.  Determining whether a new economic force represents a structural reset to a new economic baseline or simply a random cyclical blip is the key criteria for usefulness with economic forecasting.

Our readers know that the major events which shook up 2014 forecasts occurred within the divergence of national monetary policies and the energy sector.  Shrinking US bond yields (the ten year fell from 3.0% to 2.2% during the year) during a period of tightening monetary policy, fundamental strength, and equity market gains were unlikely.  As yields fall, bond prices improve, so fixed income investments had a better year than most analysts expected.

Next, the advance of North American energy independence (via technological breakthroughs) had already been largely accepted, but most analysts did not make the next leap to a +40% price drop in oil.  Perhaps we had gotten used to the inevitability of $4 dollar a gallon gasoline and $100 per barrel oil, especially if advancing economic activity boosted inflation.  Instead, we are in the enviable situation of decent employment, stable housing, contained federal spending, slow monetary restriction, solid market returns, and (paradoxically) low inflation with the potential for even more energy savings in the future. 

Economics is the study of trade-offs; no self respecting economist would have made a projection this optimistic last year.  As it turns out, the negative tradeoff of the US “goldilocks” scenario most affected international and commodity investors, which suffered as US currency dominated our peers, particularly energy exporting nations. 

The Updated Market Targets for 2015

Let’s see what the S&P 500 forecasts are for 2015. 

Institution

S&P Forecast for 2015

Credit Suisse

2100

Federated Investors

2350

Barclay’s

2100

Goldman Sachs

2100

JP Morgan

2250

Citi

2200

Morgan Stanley

2275

Bank of America / Merrill Lynch

2200

Oppenheimer

2311

Deutsche Bank

2150

Columbia Management

2200

UBS

2225

Blackrock

2160

Prudential

2250

Interestingly, some of the analysis behind these predictions suggests a peak for the US market around the middle of the year, when the Federal Reserve is projected to finally start increasing the Federal Funds rate.  This should, at least, increase short term rates even if the yield curve gets flatter.  This could spark the long awaited correction in the fixed income market, particularly against interest rate sensitive bonds.  Furthermore, several analysts are calling for a mid-year equity correction, despite the fact that their S&P year end targets are positive.  After a bullish run of good news, the gradually higher costs on borrowing could hit US stock prices which have grown dependant on accommodative monetary policy.  International fundamentals are generally not as strong as the US, but the valuation disparity could encourage investors to scour developed international markets for bargains and emerging markets for growth opportunities.

Just for fun

Finally, let me offer my own non-economic prediction for 2015 on a topic near to my heart:  dessert!  By the late 2000’s, cupcakes were the big trend but have fallen to cake pops.  By the early 2010’s, red velvet and salted caramel treats were fashionable choices.  2014 has seen a French macaron explosion, but I predict 2015 will be the year that exotic citrus flavorings – blood orange, key lime, Meyer lemon – comes to prominence.

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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