Some End Of The Year Thoughts

In no particular order are some things that have been going through my head as the year runs down.

1.  Most Wall Street prognosticators foresaw 2014 as being a year of low market returns {S&P 500 will likely go out with double digit returns}, rising interest rates {interest rates declined}and when they had a forecast on oil generally saw it trading much higher than where it currently rests.  Lesson:  Don't listen to prognosticators unless they are speaking in probabilities.  Even then accept the fact that much of what they think will occur will likely be wrong.  That includes probably me as well!

2.  In conjunction with a low return world, 2014 was also supposed to be the year when stock picking returned to the forefront.  Stock pickers were walloped once again by plain old vanilla indexing.  Probability suggests we'll see more of this next year irregardless of how the markets do.  There's simply too much friction in the active management world.  Taxes, turnover, spreads single stock events friction of trading are a constant drag on performance.   No elixir seems to be out there that takes away these inevitable nicks to performance.

3.  The world is trying to go someplace, trying to find some new sort of order.  You see this with the events in Ukraine, the Middle East, China and now even Cuba.  Hard to envision where this is taking us or what kind of impact this will have on markets next year and in the long run.  Probability suggests that events outside of our borders will likely be a larger driving influence on stock prices in 2015.  We'll talk more about this next year.

4.  If the last few months are any indication then we will likely see more volatility in markets in 2015.  Put on your seatbelt folks because the roller coaster may return next year.

5.  I'm in David Rosenberg's camp.  "Anybody who says they know where oil is going is either a liar or delusional."  That said there are structural changes in not only the energy markets but the way energy is being produced and consumed that may begin to be felt in other ways next year besides the price of oil.  This is something else we'll plan to discuss in 2015. 

6.  While the year isn't over yet, it's unlikely that any S&P sector is going to replace energy as the year's worst performer.  Probability suggest that energy won't be in the same boat come the end of 2015. 

7.  The US economy continued to improve in 2014.  Probability suggests it should continue to grow in 2015 as well, maybe for the first time consistently growing at a better than 3% clip.  The decline in gas prices has the potential to be a huge economic tailwind if it continues.  

8.  A 3% gain in GDP is supportive of stock prices at current levels, all else being equal.  We are working on our economic analysis for 2015.  Our current thinking regarding our cone of probability for stock prices  by year end 2015 is 1,700-2,400 on the S&P 500.  That's a much bigger range than normal, reflective of the potential for much more volatility next year.  I think we have the possibility of hitting all these numbers in 2015 and maybe more than once for some!  Treat these thoughts as preliminary and we'll be back with more details on this in January.   

9.  Probability also suggest that foreign markets {which have also stunk up the joint again this year} have the potential to outperform the US next year.  I've now felt this way over the last four years.  Someday I might even be right.

10.  Finally a time to say thank you and to also say a few words about all of you.  I do not write this blog for thousands.  It is written solely for the clients and friends of my firm Lumen Capital Management, LLC.  Anybody is of course welcome to read what I put out over the web, but you, my clients and friends, are the only audience that matters to me or that I'll pay attention to.  So today I'll say a big thank you to each and every one of you.  Many of you have been with me long before I started on my own.  Others came later and others followed me through a couple of brokerage firms  and stuck around during the dark days of two very long bear markets.  I'd like to think I've rewarded that patience.  I know I'm constantly rewarded by your friendship.  

I have client relationships that now go on decades.  In that case, as inevitably happens, a Higher Authority calls some of us home.  This year I must say farewell to Mrs B. I hope your reunion with the family was glorious.  On other fronts, I will also light a candle for Mrs. Miniver {Not her real name but she'll know who I'm talking about},  Ms. Helen in the northern "burbs",  my buddy David, and Mrs. SC in Indy-thankfully the other car was a foot too short.  Finally I'll leave a lantern out for a very good friend of mine who shall remain nameless but has been walking for a long time in darkness.  It is my sincere prayer that he finds his way out of the shadows in 2015.  

For the rest of you once again thank you.  We're going to take some time off until after the first of the year.  There's going to be a few new things to discuss then, along with a few new initiatives.  Happy Hanukkah, Happy Holidays and Merry Christmas.  Here's to a prosperous 2015 to us all.

God Bless and be safe into the new year.