Saturday, February 13, 2016

Stock Market Predictions

Year to date the S&P 500 has returned -8.77%, but its average price-earnings ratio is still 19.3, which is unappetizing. My investable portfolio is down about 4.5% for the year (and down about 6% from its 2015 high versus the S&P 500's being down 14% from its 2015 high).  I'm currently about 25% in stocks.  My bet is that the market will continue to fall further this year, rebound this year, then fall again next year, so I will continue to keep much of my money out of the market until I see a correction closer to an average of S&P 15 times earnings (versus the current 19). That implies a fall of 21% from here unless earnings improve.  If stocks fall another 15% or so, I'm probably at least partially back in. If  the market does rebound from here, I will miss the rally, but better to be able to retire with my current portfolio than risk a 40% decline.  With my current asset level I can retire, but I cannot retire if it falls by 40%.

The Fed seems to have painted itself into a corner: It is running out of ammunition.  The world economic picture and aging boomers militate against a strong-demand economy.  Because of its obsession with demand and with growth rates, the Fed may overstimulate. If it doesn't, there will be declining stock prices and a slow economy.   

Moreover, we are at an ambiguous point in the commodity cycle.  Both oil and gold may have touched bottom, but that's unclear.   I had read that a bottom of $25 is likely for WTI crude price, and today's bounce to $29 seems to be consistent with that claim.  Today's bounce was painful for my oil short, but overall my investable asset portfolio is down year to date  less than the S&P 500 because I had removed much of my investment assets into cash.  I'm not sure that I still believe that $25 is the bottom for oil.

One thing I've learned is that low p-e ratios are not indicative of short term positive returns.  I didn't do better because of my poor timing on a couple of oil shorts and because my stock investment choices have been dismal.  These included falling into a value trap whereby I bought financial stocks because their valuations were fairer than the market average, yet the low-priced stocks underperformed the market this year.  Low valuation is not the only measure for short-term performance, and in today's market I'm not sure that low valuation doesn't signal poor momentum rather than the market's overlooking a good buy. It is probably true, as Morningstar points out, that in the long run the financial stocks will overcome their association with oil lending and outperform, but I don't believe that the market for oil or stocks will stabilize for the next couple of years.

Gold has taken me by surprise, but I'm not convinced that its positive performance will continue unabated. I am getting ready to go long again on gold, but I suspect that there will be renewed easing that will complicate commodities prices for a while longer. 

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