Finance experts of all kinds recommend that wise investors make sensible investments under the assumption that they don’t know what the market will do. Following that advice requires recognizing that markets are difficult to predict.
Here are five of the moments in 2015 we were reminded how difficult it is to predict what markets are going to do or when markets are going to do it.
Oil stocks had a tough year in 2014 as the price per barrel dropped 45 percent. Since oil demand has not dropped, the lower price was enough to convince some investors that the moment was ripe for a big resurgence. Economics tells us that at the lower price, demand should increase and supply should drop, pushing the price higher. Common sense agrees. After all, since everyone is still driving cars, how much farther could the price per barrel drop?
As it turns out, the price per barrel could drop a lot further. Suppliers were deeply invested and unable to withdraw easily. Buttressed by pre-crash contracts and new cash infusions, oil companies continued to increase production, fighting for market share even in the face of sharp losses. The net result was a price per barrel that dropped another 30 percent to around $35, cratering oil stocks and disappointing aspiring market prophets.
Consumer Discretionary Stocks
At the end of 2014, Amazon, Facebook, Alphabet, and Netflix were each tarnished with worry of impending doom. Amazon was threatened by entrant Alibaba. Facebook was accused of losing touch with young people. Google had set new records in both market share and market price, maxing out its current potential on any reasonable scale. Netflix faced increased streaming competition from HBO, Showtime, Hulu, and others.
Despite those apocalyptic signs, each of these companies posted double-digit to triple-digit growth in 2015. Amazon nearly doubled its share price, sending its P/E to over 960. Facebook continued its steady growth as if it were the only social media platform worth talking about. Google made new strides toward world domination. Netflix more than doubled its share price.
In 2014, the US Dollar gained 12 percent. Since the Federal Reserve delayed increasing interest rates for most of 2015, that gain might have reversed or at least stabilized. After all, that’s what higher rates do in the best of times, and the oil crash might have created a situation that was far worse.
Seemingly out of spite, the dollar insisted on rising another 10 percent in 2015, to the consternation of export-sensitive sectors like agriculture, especially wheat. While the rapid gain surely must correct at some point, the Fed finally did increase interest rates, perhaps setting the stage for more gains next year.
Speaking of the Federal Reserve, government may be the most unpredictable market factor ever. Expected to increase rates early in the year, the Fed delayed until late in the year. As fears of China’s growth having hit a wall intensified, China devalued the yuan, bolstering China’s exports and spurring even more growth.
The government chaos of 2015 may be less than the government chaos foreshadowed in 2015. As President Obama’s tenure comes to a close, contending hopefuls have pushed drastic economic platforms, including 50 percent increases to minimum wage and modifications to social security. The economic effects of these decisions remain both misunderstood and underappreciated.
Greed and Fear
As always, the most serious problems with attempts at market predictions are human greed and human fear. When China devalued the yuan, fear dropped the market by 12 percent. When the Federal Reserve hesitated to increase rates, fear interpreted the action as being weak.
On the other hand, the distortion of miniscule interest rates has elevated stocks and greed has pushed them to all-time highs. Oil companies determined not to lose have delayed their inevitable consolidation, maintaining revenues today at tomorrow’s cost.
Sensible investment consists of good principles, not good guessing. Please speak with Preferred CFO for help with allocating your own assets.