As I close out today with my last editorial for the month of January 2015, I want to share some very interesting observations with my readers.
This morning, as I write this issue, the futures market is showing the Dow Jones Industrial Average will open down 150 points. It’s been a difficult month for the Dow Jones. Not even including today’s downdraft, the Dow Jones is down 2.5% for the month of January. Not a good year-ahead indication for stocks.
But what has me really worried are the gyrations in the daily trading of the Dow Jones companies. One day, the Dow Jones is up 100 to 200 points; the very next day, it could be down 100 to 200 points. This is a negative for stocks, because it tells me traders can’t commit on market direction. They are trading in a “knee-jerk-type fashion,” which makes it very hard for them to make money.
Global Economic Situation Worsening
As I said in my full-year 2015 outlook for stocks (you can see that prediction in my video here), the global economy is awash in trouble. Canada lowered interest rates last week, because it’s afraid that lower oil prices will impact the Canadian economy. Japan is printing money to stimulate its economy. The European Central Bank (ECB) will be printing 60 billion euros a month to stimulate its economy. Greece has voted in a government that wants to basically renege on its austerity deal with the eurozone. Russia is in huge economic trouble (it lowered interest rates this morning). And initially, we thought China’s economy grew in 2014 at its slowest pace in 13 years; now we hear that last year was the slowest year of growth for China in 24 years.
If the economic world around us is crumbling, the U.S. cannot escape the downdraft…especially when almost half the S&P 500 companies derive revenue from outside the U.S.
Strong U.S. Dollar Hurting S&P Companies
Then we have the negative impacts of a strong U.S. dollar. If almost half the S&P 500 companies derive revenue from outside the U.S., and the U.S. dollar is getting stronger each passing day, aren’t these companies getting the double-whammy of lower sales outside the U.S. and the value of those sales declining on the currency exchange? After all, American companies report their earnings in U.S. dollars.
The Federal Reserve, in raising interest rates, will show the world it has been able to magically craft the perfect turnaround for the U.S. economy. But is arrogance wise at this time?
Gold Price Suppression Will Not Make It Past 2015
Then we have the interesting gold situation. If we are headed towards a future where the only tool central banks have is the printing of more paper money to stimulate their economy (and that’s exactly what it looks like), then gold prices should be at more than $2,000 an ounce. But the powers that be have kept the pressure on gold. This also cannot go on forever.
And I don’t buy the mainstream media’s fixation with the Federal Reserve’s interest rate policies. If interest rates go up a quarter-point or down a quarter-point, it doesn’t matter to the U.S. economy, because would-be homeowners can’t get a mortgage (and small business owners can get loans) if they don’t have good credit.
To say gold is not going up because interest rates will rise, or to say the stock market will rise if the Fed pulls back on its promise to raise interest rates in 2015 is rubbish.
Stock Still Severely Overvalued
The bottom line is that this rally in stocks has been too long in the tooth. Stocks have gone up from 6,440 on the Dow Jones in March of 2009 to almost 18,000. Stocks are fully valued. In fact, they are overvalued. When you look at the fourth-quarter 2014 earnings reports coming out from companies, take out the surprises from Apple Inc. (NASDAQ/AAPL), Amazon.com, Inc. (NASDAQ/AMZN), and a few other tech giants, the industrial and financial companies had a poor 4Q14 and their forecasts for 2015 don’t look much better.
My opinion remains: the risks of investing in stocks in 2015 outweigh the rewards.