Nobody has a crystal ball that can tell us what the market will do, but it can be fun to speculate. Is there more potential for stocks to drop in 2015, or could stocks add to the gains of the past few years?
We asked three of our analysts for their thoughts on the matter, and here is what they had to say. What do you think will happen?
Matt Frankel: I actually think there is a good chance the Dow could drop in 2015. I don't think we'll see a "crash" or anything like that, but something in the neighborhood of a 10% correction.
The current bull market has been going on for about six years now and has gained about 170% since the 2009 lows, without any major corrections whatsoever. The average bull market lasts for just under five years, and while there have been exceptions in the past, I do believe we are overdue for a correction in this case.
Simply put, stocks have gotten rather expensive. As of this writing, the average S&P 500 stock trades at a lofty P/E ratio of 19.65, well above its all-time average of 15.53. Economic data has been pretty solid for the past few years, and it looks like the recovery will continue, but the difference now is that people have higher expectations for the market. Companies are expected to maintain a certain level of earnings growth, and any data to the contrary could be a huge negative catalyst this year.
Finally, if the Fed does start to raise rates like many people expect, it could significantly slow down the United States' economic growth, creating yet another negative catalyst.
Nothing in investing is a sure thing, and there are certainly plenty of reasons to be bullish this year as well, but I think there is more potential to move downward this year.
Dan Caplinger: Trying to predict exactly where the Dow will finish any given year is largely an exercise in futility, as many great investors can attest. But in my view, the bullish and bearish factors affecting the stock market right now are almost perfectly in balance, and that suggests to me that the Dow will finish the year just about where it ended 2014.
On one hand, the U.S. economy remains much stronger than most other developed economies, which has encourage capital inflows and should help to support stock prices. Moreover, low interest rates continue to make alternatives to stocks unattractive, with bonds in particular not only paying little in income but also having substantial risks of capital losses, especially for issues with long maturities.
At the same time, though, the six-year-old bull market faces some new challenges. The Fed has declared its intention to become less accommodative with its monetary policy in the near future, and many believe that could reverse at least part of the rise in stock prices we've seen since the financial crisis. Meanwhile, global economic and political tensions pose risks that could spread into the U.S. market and affect Dow stocks. The rise of the U.S. dollar has already hurt many Dow components' earnings growth, and further appreciation is possible if the Fed starts to raise rates. The combination of those bullish and bearish factors leads me to take a flat view of how the Dow will do in 2015.
Todd Campbell: There's no greater certainty in making predictions than the certainty that those predictions aren't likely to pan out as planned. After all, Mr. Market has a way of humbling investors whenever they think they've got "it" figured out.
But even after saying that, I tend to think that past may prove to be prelude in 2015. One of the trusted books on my desk for the past 15 years is the Stock Trader's Almanac, a treasure trove of historical trends. Reading it this year, I was struck by the winning track record markets have posted in Presidential pre-election years. According to the Almanac, it's been 76 years since the Dow Jones Industrial Average posted pre-Presidential election year loss. That's an impressive track record and anecdotally, it makes sense. After all, the party in power tends to juice the economy in the final years of a term to ensure voters are show up to the polls happy.
Whether or not that winning streak continues again this year is anyone's guess, but given that the historical average return for the Dow Jones Industrial Average has been about 10% in Presidential pre-election years, I wouldn't be shocked if we headed higher by a similar amount this time around too.
Basically, it's impossible to predict the future. These were some of our best guesses. What's yours?