Profit Confidential ( — www.ProfitConfidential.com), an e-letter published by Lombardi Publishing Corporation, a 29-year-old consumer publisher that has served over one million customers in 141 countries, is providing a cautious stock market outlook for 2015 and advising investors to focus on capital management.
“The stock market faces a growing number of uncertainties in 2015, most notably the global economy, rising interest rates, aggressive share buyback programs, and weakening growth in stock prices,” says economist and lead contributor Michael Lombardi. “As a result, I don’t expect the key stock indices to perform anywhere close to how they did in 2014; in fact, it wouldn’t be a surprise to me if we see them decline for the first time since 2009.”
Lombardi explains that the annual growth rate in stock prices is dissipating. After a spectacular rebound from the March 2009 lows, starting with 2012, the annual growth in stock prices for the 30 Dow Jones Industrial Average companies has been declining. In addition, corporate earnings growth—if you don’t include stock buyback programs, which prop up per-share earnings—is at its lowest level since 2009.
Over the last six years, the stock market has been supported by the Federal Reserve’s monetary policy, says Lombardi. The central bank is expected to start raising interest rates (the federal funds rate) to one percent in 2015, above two percent in 2016, and above three percent in 2017. In the long run, the federal funds rate will be in a range of 3.25% to 4.25%. (Source: “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2014,” Board of Governors of the Federal Reserve web site, December 17, 2014; http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf.)
“While these rate increases might not sound significant, consider that the current federal funds rate is 0.25%; increasing it to just one percent means a change of 300%,” Lombardi adds. “With margin debt at the New York Stock Exchange near half a trillion dollars, when the Federal Reserve increases its benchmark interest rate, borrowing rates will increase and investors who continued to buy on margin will come under pressure as the cost of borrowing rises sharply.”
Finally, Lombardi observes that, save for the U.S. and Canadian economies, a global economic slowdown is all but inevitable. Major economies, including those of Russia, China, Japan, and the eurozone, are either grinding down or are teetering on the brink of or are in a recession.
“This past October, the International Monetary Fund said it expects the global economy to grow 3.8% in 2015. I believe these estimates are way too optimistic,” Lombardi observes. “When I look at the leading economic indicators, I see a severe global slowdown in play. And with roughly half of all S&P 500 companies getting revenues from outside the U.S., a slowdown in the global economy will hit American stocks hard.” (Source: “World Economic Outlook: Legacies, Clouds, Uncertainties,” International Monetary Fund web site, October 2014; www.imf.org/external/pubs/ft/weo/2014/02/.)
“My economic forecast for 2015 shows the upside for stocks looks very limited, while the risks on the downside are high,” Lombardi concludes. “Key stock indices have increased far beyond their fundamentals. And the higher they go, the bigger the fall is going to be.”
For more information on Profit Confidential, visit www.ProfitConfidential.com.
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.lombardipublishing.com.
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