Get an early glimpse into Fisher Investments' thoughts on global markets for the year ahead.
Below is the Executive Summary. Click here to download the full report.
Despite October and mid-December choppiness, global stocks ended 2014 positively, with the MSCI World Index rising 1.0% in Q4, bringing full-year returns to 4.9%.[i]
Peering into 2015, the global bull market should continue, with world stocks likely rising double digits. Nearly six years in, market fundamentals remain robust. The world economy is growing, with an accelerating US leading the developed world. Most western nations’ governments are gridlocked, reducing radical legislative risk materially hurting stocks—particularly in the US, where 2014’s midterms brought more gridlock, as we expected. Markets have historically celebrated gridlock with positive quarterly returns in 86.4% of midterm-year Q4s (technically, that percentage goes to 87% after a positive Q4 2014) and Q1 and Q2 of the years after (a feature we’ve called, “The 86.4% Miracle”). This solid start helps explain why the third year of a US president’s term is historically the strongest of the four-year cycle, with an 18.5% average return and only two negative years since 1926—both in the 1930s.[ii]
MORE: Interested in market analysis for your portfolio? Our latest Stock Market Outlook looks at key stock market drivers including market, political, and economic factors.
A correction—a sharp, sentiment-driven drop of -10% to -20% over a few weeks or months—is always possible and can start for any or no reason, but corrections are impossible to predict. They come and go relatively quickly with no lasting impact if you stay disciplined and ride through them, and they are normal in bull markets. We always encourage investors to prepare mentally for the possibility of quick, temporary drops, but tactically, that possibility shouldn’t influence portfolio positioning—the longer-term market outlook matters far more.
We don’t currently see a compelling reason for this bull market to end soon. Bull markets end one of two ways: the wall or the wallop. Bull markets climb a wall of worry until there is no more worry and no more wall to climb. At the euphoric top reality can’t meet lofty expectations, and stocks start their slide. Or the bull market gets walloped by a huge, unseen negative with the power to knock trillions off global trade or GDP. Sentiment is warming but far from euphoric—most still don’t fathom how bright the future can be. Some dogged fears persist, providing stocks more wall to climb. A wallop, though possible, isn’t probable—today’s risks are either too widely known or too small to have a massive, surprising negative impact.
Professional forecasters were too timid in 2014 and remain so now. Average return expectations are about as muted as 2014, with none higher than about 14%—well below historical bull-market averages. Given stocks’ tendency to land outside the main cluster of professional forecasts—and the low likelihood of a bear market—this implies US stocks rise more than 10%. Whether 10% or 30% doesn’t much matter practically—either way, 2015 looks like a good year for equities.
Geographically, America remains in the economic driver’s seat, with growth above its post-war average in four of the past five quarters. The Leading Economic Index (LEI) continues rising, fueled by the yield spread and credit availability, implying growth ahead. New orders in manufacturing and services are surging. Earnings and revenues are growing apace. Loan growth is accelerating. Corporate balance sheets are cash-flush—fodder for continued capex and expansion.
While most acknowledge America’s strength, few fathom the global economy’s strength. In the eurozone, for example, most fixate on slowing services and manufacturing indexes, fearing a deflationary depression, yet overall economic growth continues. Choppy but rising LEIs indicate continued, uneven growth, which should beat dreary expectations. Similarly, in the UK, many fret strong household spending and services means the expansion remains “unbalanced”—a misdirected pessimism, in our view. In China, most focus on slowing monthly numbers, ignoring that China growing around 7% contributes more than ever to global GDP growth.
Risks exist, as always, but as mentioned previously, we see none likely to truncate this bull market. Falling oil prices are often cited as such, but crude’s steep decline is tied largely to a vast supply increase as the shale boom continues and Saudi Arabia remains dedicated to retaining market share. Meanwhile, energy demand is healthy. Some suggest commodity markets’ volatility must soon spill over to equity markets. This is a fallacy. Information flows freely and swiftly through all capital markets, making it impossible for oil markets to know something equity markets don’t.
We will detail these and more in the forthcoming full Stock Market Outlook. Meanwhile, to follow our ongoing commentary on global markets and related events, please visit our website, www.MarketMinder.com or subscribe to a weekly roundup of our writings here.
- The Investment Policy Committee
Commentary in this summary constitutes the general views of Fisher Investments and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. The MSCI World Index measures the performance of selected stocks in 23 developed countries and is presented net of dividend withholding taxes and uses a Luxembourg tax basis. The S&P 500 Composite Index is a capitalization-weighted, unmanaged index that measures 500 widely held US common stocks of leading companies in leading industries, representative of the broad US equity market. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets. You should consider headlines and developing stories in the broader context of overall market conditions and events. A single geopolitical event or corporate announcement is unlikely to move broad markets materially. You should carefully consider investment actions in light of your goals, objectives, cash flow needs, time horizon and other lasting factors.
[i] FactSet, as of 1/2/2014. MSCI World Index returns with net dividends, 9/30/2014 – 12/31/2014 and 12/31/2013 – 12/31/2014.
[i] Global Financial Data, Inc., as of 02/19/2014. S&P 500 Total Returns for the years 1927, 1931, 1935, 1939, 1943, 1947, 1951, 1955, 1959, 1963, 1967, 1971, 1975, 1979, 1983, 1987, 1991, 1995, 1999, 2003, 2007 and 2011.