There are few original ideas in the investment world, but it pays to quickly latch onto good ones, so we’re going to endorse the latest thinking from Michael Hartnett, chief investment strategist at Bank of America. Hartnett says 2015 will be about “buying Main Street and selling Wall Street.”
We like the idea that middle-class Americans are poised to finally enjoy the fruits of five years of economic recovery. The November employment report showed a surprising jump in wages for U.S. workers–up 0.4 percent—and could signal a new phase in the cycle, one in which the benefits of economic growth flow more to workers and less to shareholders. Obviously one month does not a trend make: three times since 2008 the Labor Department reported monthly wage gains equaling the November increase, and each time wages either slipped back or flat-lined. Things might be different this time, however, as November wage data marked the fourth monthly increase in 2014 of at least 0.3 percent, all without a single month of decline. This hasn’t happened since 2008. A series of promising retail sales reports and a huge fillip for consumer’s wallets courtesy of collapsing gas prices add to the bullish argument.
Given that the phrase “it’s different this time” is one of the most dangerous in the investing catechism, we await further data to confirm a wage breakout. In the meantime, here are my thoughts on the eight economic and market “keys” for 2015:
- The U.S. economy continues to show accelerating growth, driven by increased corporate capital spending and bank lending, both of which are rising from moribund levels of the past few years.
- Foreign economies continue to be weak; China growth decelerates from 8 percent to 5 percent, as financial system reform takes hold. Europe remains stagnant at best.
- Inflation remains quiet. Commodity prices drift lower in the first half of 2015, as U.S. energy production remains robust and the China growth story reverses. Moderate deflation remains a risk in Europe.
- US home price growth flattens out, as investment demand wanes and first-time buyers are nowhere to be seen. Expectation is 2-3 percent appreciation for the average US house in 2015, with renewed price declines in some of the hottest markets.
- Federal Reserve bond purchases (Quantitative Easing) do not resume UNLESS outright price deflation is sustained for six months or more in the U.S., which we do not expect.
- The Fed begins to very slowly raise short-term interest rates late in the third quarter of 2015, with ¼ point increases every six to eight months thereafter. Long term “normal” for the Fed Funds (overnight) rate is 2 percent. It may take five years to get there!
- S&P 500 earnings growth of 7 percent is our initial estimate for 2015; $124 is our single-point estimate. Faster revenue growth pushes this number up. Fewer share buybacks, higher interest rates and higher depreciation charges pull it down.
- Using a 16 to 17 multiple, fair value range for the S&P 500 for year-end 2015 is 1985 to 2110.
The S&P 500 closed on December 19, 2014 at 2070.65, just 2 percent below the top of our estimated fair-value range for 2015. To rephrase what we said up above: more for workers – less for owners.
Happy New Year!
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