My Hopes for 2015

I’m no good at predicting what’s going to happen over any one year period, so I’m going to try something different for my 2015 outlook. These are my hopes for 2015. I don’t know if they will happen, but I hope so.

I hope the S&P 500 finishes the year down 10-15%.  Last week I was asked what could potentially derail the markets and cause a meaningful correction. I find that searching for a single catalyst that will lead to a sell-off is nearly impossible. The problem is that markets aren’t conditional. There’s no if X happens, then Y will surely follow. Even if you were able to predict unforeseen events perfectly, you can’t predict how investors will react. So my biggest worry isn’t an event or data point — it’s investor psychology.

Stocks climbing the wall of worry is cliché, but it’s one of the easiest explanations for the continued bull market following the crash when most were certain a recovery was never coming. Yet this can only work for so long. The wall of worry becomes a problem when investors become complacent. Think about how quickly the market has snapped back every time there’s been a pullback over the past couple of years.

Rachel Shasha from Sassy Options has a great chart that shows all of the V-shaped rallies since 2013:

These quick snapback rallies from minor corrections can condition investors to expect that they will continue every single time the market falls. Investors become complacent and risk management goes out the window. Once complacency sets in, that’s when markets are at risk of further declines as the rug gets pulled out from under investors when things don’t go as planned. If the conditional rally doesn’t occur in short order, people start to sell first and ask questions later.

This is why I hope U.S. stocks finish down in 2015 – just enough to show investors that it’s possible, but not a large enough fall to feed the perma-bear crash callers. Would it really be all that painful if the market gave back the gains from 2014? I think we need a reminder that stocks can go down. This would be a great way to see how many of the newly minted long-term investors could actually hang on. Plus, I’m a fan of making retirement contributions at lower prices, not higher prices.

Will it happen? Not a clue. Stocks are down the first three days of the year (which means nothing), but it seems that everyone now expects a melt-up. This wouldn’t be the best outcome considering stocks are up 50% since the beginning of 2013 and 160% since the beginning of 2009.

Stocks do fall one out of every four years, on average, so they’re definitely due, but these things can last a lot longer than most people assume.

I hope we continue to see intelligent people innovate in the investment industry. The great thing about the innovations we’ve seen over the past few years — robo-advisors, new ETFs, lower costs, social networks — is that the biggest beneficiaries have been average investors, not the big Wall Street firms. I hope this trend continues and I see no reason for it to stop now.

I hope we see a continuation of wins for main street. CEOs make 354 times the salary of the average worker. The top 1% owns 50% of all stocks and mutual funds. The majority of the gains from the recovery following the financial crisis have gone to corporations and the wealthy (mainly from lower borrowing costs and higher stock prices). It would be great to see the economic recovery take off this year and lead to wage gains for those that so desperately need it, even if it leads to a hit in profit margins for corporations and a declining stock market.

The one positive in 2014 for consumers was the huge crash in the price of oil. While Wall Street scrambles to figure out the implications from this development (seriously, no one really has a clue what the effects will be on the markets), regular people are overjoyed at the prices we’re seeing at the pump. It would be nice to see more benefits like these accrue to main street in the coming year.

I hope outrage and backlash on the Internet are replaced with gratitude and positivity. Not holding my breath on this one.

I hope we see some better movies. 2014 might go down as one of the worst years in decades for movie quality (see here). I saw some pretty good movies in 2014, but definitely not any great movies. Networks like HBO, Showtime, Cinemax, AMC and even Netflix have helped turn great TV series into the new movies over the past 5 years or so. I hope movies stage a comeback this year with something besides superhero sequels.

I hope to write more short-form posts. One of my favorite bloggers is Seth Godin. Not only is the guy brilliant, the he’s a master at making hard topics easy to understand. The thing I love about his blog is the fact that he can drive his point home in 10-12 sentences (sometimes less) while still saying something meaningful. I hope to mix in more posts in Godin’s short-form this year.

Obviously this isn’t one of them as it’s already getting a little long…Happy New Year.

Sources:
New Highs From the Infamous V….What’s Next? (Sassy Options)

Further Reading:
Pattern Recognition
Adam Sandler & Complacency Risk
Louis CK on Risk Management

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