This is still one of the most hated bull markets, with a good number of views predicting a stock market crash in 2015.
Yet, going back in history, investor sentiment is often in denial regarding the stage in which a market cycle exists. If anything, history reveals that market cycles have a tendency to last for long periods of time.
I’m of the opinion that it hasn’t been a bull market since the market’s recent low set in March 2009. In the three years preceding the financial crisis and the near-total breakdown of the world’s capital markets, stocks were in recovery mode.
I believe we’re in a secular bull market that began at the beginning of 2013, when institutional investors decided to ignore policy makers and started buying blue-chips. Within the context of a secular bull market, there can be economic recession, full market corrections, and all kinds of differing sentiment.
On the cusp of a new interest rate cycle, things are only beginning to get interesting.
Is a Stock Market Crash in 2015 a Likely Outcome?
It’s always a possibility considering the potential for extraneous shocks like war, a big derivatives trade gone bad, or a natural disaster, for example.
But there is actually a lot of certainty in this market; and that is what institutional investors want.
We know that the stock market has done incredibly well over the last several years due to unprecedented monetary policy. But while this market is fully valued, given prevailing interest rates, it’s not overvalued.
And the fact of the matter is that even if the Federal Reserve raises rates a couple of quarter points over the next 12 to 18 months, the cost of capital is still low.
Portfolio Strategy for a Change in the Business Cycle
Generally, it’s not usually a good idea to fight the Fed when it comes to your equity market investments.
In terms of portfolio strategy, even if we are in a secular bull market that may run until the end of this decade, investment risk remains high considering the incredible capital gains of the last few years. This is a market that’s overdue for a 20% haircut.
Accordingly, I continue to like dividend-paying stocks, even in a rising interest rate environment (initially), and I feel that portfolios are better served when weighted towards blue-chips. (See “Dividend-Paying Stocks for a Market at its High.”)
Corporate balance sheets continue to be in very good condition as both cheap money and risk aversion have caused cash balances to swell.
Big companies are lean and mean. And as we’ve seen over the last two years, upticks in sales translate right into the bottom line.
Yes, U.S. dollar strength is an issue going forward. But it’s now a market certainty. Investors know that currency translation is going to affect multinational earnings. The marketplace has already seen it and dealt with it.
Things are probably going to be pretty choppy in the stock market. The current environment is typically a tough time for stocks, especially in the absence of earnings reporting.
This market may keep on churning right into the fourth quarter. Current corporate outlooks expect a reacceleration of business conditions in 2016. It may just be that we’re at the beginning of a new business cycle.