Presentation of Economic Forecast 2015

Transcription

1 Tuesday, January 6, 2015 Presentation of Economic Forecast 2015 by Ian Gendler, Executive Director, Research & Introduction to Value Line Products by Jason Wiseberg, Executive Vice President, Sales

2 (continued from p.2) Institutional Services Webinar Institutional Services valuelinepro.com 2 Institutional Services Webinar Tuesday January 6, 2015 Looking Forward to 2015 Economic Forecast Presented by Value Line Institutional Services A year ago, in assessing the old year, we had opined that It was a stellar 2013 on Wall Street. One year later, we are looking back on a clearly less-imposing 12 months. To be sure, 2014 was decent, all things considered, as the 11.4% rise in the Standard & Poor s 500 Index, the 13.4% gain in the NASDAQ, and the modest 7.5% uptick in the Dow Jones Industrial Average would attest. Still, relative to the eye-catching increases achieved in 2013, this most recent year s showing was rather pedestrian. Still, given the historic bull market of the past half decade which has seen the Dow rise from less than 6,500 to just above 18,000 even the small strides made in 2014 were rather impressive. As for the Dow, there was a core of strong gainers in 2014, the limited overall improvement notwithstanding, with two oldline technology stalwarts, Intel and Microsoft, taking the first and fourth spots, respectively, on the Dow Industrials, and UnitedHealth Group and The Home Depot taking the second and third spots. Meantime, the fifth spot was taken by another well-known tech name, networking giant Cisco Systems. Meanwhile, just eight of the 30 Dow stocks showed losses for the year, with the three biggest laggards being IBM, Chevron, and General Electric. Looking at the list of 30 blue chips, there were few

3 3 (continued from p.2) recurring themes, with the notable exception of selective strength in technology and overall weakness in energy. Meantime, the large-cap sector, despite its inconsistencies, mostly outshone its lesser-cap rivals, including the Russell 2000, which gained 3.5% and the AMEX Major Market Index, which edged up just 0.7%. There are reasons for this sharp divergence, not just regarding the different performances between the respective capitalization categories, but also between the market s overall showing in 2014 versus the year before, when just about every group prospered. For starters, the market began 2014 at a much higher level, following the heroics of the prior year, thereby making even aggressive profit taking quite defensible. Also, we may be slightly closer to a tightening in monetary policy by the Federal Reserve, with such an event now perhaps less than a year away. That said, the Fed is retaining, in an overall sense, its considerable time phraseology in describing how long it plans to maintain its present, historically low, interest-rate structure, stating recently that it can be patient in beginning to normalize the stance of monetary policy. In addition to Fed policy, worries are proliferating about the outlook overseas, where it is looking increasingly dicey, and where a number of euro-zone nations are in recession or on the cusp of a downturn. Also, Japan is struggling; growth expectations are coming down in China; oil is in freefall and there are logical fears engendered by this decline; and tensions between East and West are at a higher level than at any time since the conclusion of the Cold War a generation ago, as Russia s own ills multiply. Given all of this, it would seem encouraging that stocks are doing as well as they are. In uncertain times, such as these, it is often true that larger, well-known names, such as those in the Dow, the S&P 500, and the NASDAQ will do better than their lesser-known counterparts domiciled in the Russell That was often the case in Still, the path to higher equity prices in 2014 was remarkably smooth, with just a few hiccups along the way, and with one all-time record after another being set by the Dow and the S&P 500 Index. On point, we recently surpassed 18,000 on the former and approached 2,100 on the latter, before profit taking ensued on fears of what lower oil prices could mean for global stability. Finally, we opined a year ago that valuations are rich and the risks are clearly increasing. A similar observation can be made now even after the selloff so far in early Meanwhile, at the end of 2013, we had forecast that the average price for the Dow Jones Industrial Average in 2014 would be 15,265. That target was clearly conservative. It reflected our earnings forecast for the Dow, our dividend estimates for that blue-chip composite, and a sense, which was on the mark, that interest rates would stay historically low. In all, the average price for the Dow in 2014 was 16,777. This topped our 15,265 estimate with plenty of room to spare. Our price target was short of the mark, even as earnings expectations were largely met. Our forecast for interest rates also was in line with the benign outcome. In the meantime, we were too conservative with our dividend model. Essentially, what transpired to bring about the market s further gains was that earnings were afforded a more generous multiple in 2014, in response, we believe, to the ongoing low interest rates and muted inflation again in place. Normally, stocks earn higher P/E multiples when such conditions exist, since competition from fixed-income assets is less rife. It should be noted, as well, that we look for a modest further increase (6.4%) in earnings in 2015, as the benefits of an improving U.S. economy should continue in the year ahead. Pre-2014

4 4 (continued from p.3) revisions in the Dow s composition should make the earnings track more consistent, as well, and that should help to further support current multiples. Our 2015 estimates reflecting the probability that the nation s economy will continue to thrive on the strength of further progress in housing, retail spending, car sales, job growth, and business capital investment, and that the plunge in oil will not presage a wave of dislocations globally call for Dow net of $1,182 and dividends of $416. Putting in place those metrics, the average (but not necessarily the high) price for the Dow in 2015 would be 17,300. In all, we expect a cumulative earnings gain of 6.4%, which would be satisfactory given the long and steady climb in income for the past half decade, or so. For the most part, this aggregation of blue chips likely will extend its earnings upturn in 2015, and do so with room to spare, in many cases. Note also that after having risen by 7.5% in 2014, fully 28 of the 30 Dow members are forecast to post higher earnings in As noted, our projection for the average price for the Dow in 2015 is 17,300. That is 3.1% higher than the average 2014 price for the Dow of 16,777, and a tad below the recent level of just over 17,500. This would suggest that the recent price discounts a good chunk of the rise in earnings and dividends we see in The Dow target also takes into account a year of slightly higher long-term interest rates. With the Federal Reserve still concerned about possible deflation, any change in interest rates should be modest.

5 5 (continued from p.4) In 2015, as noted, we expect the Dow s earnings to increase 6.4%, dividends to climb 7.6%, and interest rates, as gauged by AAA corporate bonds, to push up to an average of 4.6%, as the Fed figures to be only modestly less accommodative than in Such a positive mix of variables is the basis for an average price in 2015 that s slightly above the average estimated price during That said, reflecting the rather generous valuations accorded equities at this time, the estimated 2015 mean for the Dow is in line with the index s recent level, which reflects a pullback in equity prices during the opening half of December. Moreover, given the projected average price of 17,300 this year, the Dow would be selling at 14.6 times our earnings forecast of $1,182. Note that in late 2013, we had been estimating a 2014 P/E of Meanwhile, the 2015 estimated P/E implies that the market is probably fairly valued given the benign growth and inflation backdrop now in place. Note: The band about the 17,300 Dow Industrials Target allows for a wide variance in price during Specifically, our Dow model s target of 17,300 represents the midpoint of a wide projected range in which the average price of the Dow is likely to wind up in The range for 2015 is 21,630 on the high end and 13,840 on the low end. The forecast for the band for the Dow is just under 20,000 to a little over 25,300 Conclusion: All told, we remain constructive on the market s outlook for the year ahead. However, we also are mindful of the high valuations in place, the potential global risks from faltering economic growth, the rising political tensions between East and West, and the possibility that the Fed s attempts to extricate itself from years of quantitative easing may not proceed as smoothly as it hopes. n Ian Gendler January 6, 2015 At the time of this article, the author did not have positions in any of the companies mentioned. Value line institutional services For more information on our webinars, please go to valuelinepro.com or is@valuelinepro.com. Want total access? 7-Day Free Trial >> Value Line, Inc. All Rights Reserved. Value Line, the Value Line logo, The Most Trusted Name in Investment Research, The Value Line Investment Survey, The Value Line Special Situations Service, Value Line Select, Timeliness, and Safety are trademarks or registered trademarks of Value Line, Inc. and/or its affiliates in the United States and other countries. All other trademarks are the property of their respective owners