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US stock market could see big gains in 2015
SOME strategists had predicted a bear market this year, but, on the eve of Chinese New Year, the US bull market may have turned into something else - a goat market.
The term bull market derives from the upward swoop of a bull's horns; a goat's horns follow a sharper - if shorter - trajectory. After a relatively staid 2014, the stock market could be in for some big gains this year, even if those gains probably won't last long. In the last three Chinese years of the goat, the Standard & Poor's (S&P) 500 saw gains far above its average annual return of 7 per cent, with a 12 per cent rise in 1979, and massive gains of 26 per cent in both 1991 and 2003.
In terms of consistency of gains, the goat is one of the best animal spirits for the stock market. Since 1900, the S&P 500 has seen a positive return in 78 per cent of goat years, according to Sam Stovall, chief equity strategist at Standard & Poor's stocks research arm Capital IQ. That equals the record of the market's strongest Chinese animal spirit - the pig - and compares with the poisonous years of the snake, when the stock market fell 60 per cent of the time, added Mr Stovall.
All this may sound like superstition but - like human behaviour - stock-market behaviour is so mercurial that astrology is as good a prism for analysis as any scientific system.
"No one knows anything. That's the only rule," said one long-time market watcher, in a recent e-mail.
Money managers with billion-dollar portfolios often buy and sell stocks based on "market technicals" - inflection points on a stock chart that are ascribed meaning in a similar way as birth dates on a star chart.
In technical analysis, stocks are thought to encounter "resistance" at former peaks. The tech stock-oriented Nasdaq Composite is within 4 per cent of one of the most infamous stock market peaks - the all-time high of 5,132 set in 2000 before the dotcom bubble burst. The Nasdaq may well fail at its first few attempts to reclaim these heights, just as the Dow Jones Industrial Average and S&P 500 wobbled last year near their 2008 peaks. If the Nasdaq does make it past that level in the next couple of weeks, it could make a break higher, like a mountain goat who chews through a fence to freedom.
Another reason many Wall Street strategists' 2015 outlook read like obituaries was the age of the bull market. This would be the sixth year the S&P 500 has gone without the 20 per cent correction that defines a bear market, and six is a ripe old age for a bull. The longest-lived bull in history died a painful death in 2000 aged nine-and-a-half. Pessimists point out that corporate growth rates are slowing and that busts as dramatic as that in oil-and-commodity markets recently often portend recession. The eurozone is fraying at the edges, they say.
Yes, this market is showing its age - gone are the carefree 2 per cent-a-day runs led by sprightly small caps in 2010. But remember, the goat can live for years after the appearance of his white beard. And predicting when the goat will lose its footing - or succumb to the bear - is tricky business.
"We know the US can't run a US$500 billion per year deficit every year forever and we know that creating US$4 trillion on a computer to buy our own securities must have some ultimate repercussions," said strategists at brokerage Morgan Stanley, in a note to clients. "Something about today's economy, corporate earnings, expected obligations, etc, must by definition be overheated. But this thought process would have prevented you from making any money in equities in the last few years."
For the short term, the goat's feed could be the success of Friday's deal between the eurozone and Greece, and central-bank policy.
The Greek deal is precarious, conditioned on budget commitments by the Syriza government, which campaigned with promises of less-austere budgets. It's also temporary, all but assuring another round of brinksmanship when the four-month extension of European Union support for Greece runs out.
"It's probably kicking the can (down the road), but at least it's kicking the can rather than the can being taken out of the street," said Quincy Krosby, market strategist at Prudential Financial. "It keeps talks ongoing which is what the market wants to hear."
Central-bank policy is also unclear, particularly in the US, where minutes from the January meeting hinted at division on the rate-setting board over the timing of an interest-rate hike. Janet Yellen, chairwoman of the Fed, will be pressed on the rate outlook in testimony before Congress this week.
"The question-and-answer period has the potential to more markets especially given some of the questions that came out of the minutes this week," said Mr Krosby, of Prudential.
The likelihood of a rate hike means that the goat market will look quite different to last year's bull market. In 2014, the sector with the biggest gains was utilities. Utilities had drawn fixed-income investors who were tired of low-yielding Treasury bonds. In recent weeks, utilities have been among the biggest losers as Treasury yields look set to become more competitive.
The leaders this year could be companies that benefit from higher borrowing rates such as JPMorgan; and high-growth, non-dividend-oriented companies like Apple, Intel and Boeing.