I was fortunate to have the opportunity to attend the year-end North Shore Chamber of Commerce Economic Breakfast featuring Rob Lutts, Owner and Chief Executive Officer of Cabot Wealth Management, Inc. and Dave Caruso, Founding Chairman of Coastal Capital Group. Both speakers were decidedly upbeat about the U.S. stock market results for the upcoming year, but both felt less rosy about the bond market and international equity. At the time of the breakfast, S&P was up a bountiful 13% for the year and the Dow Jones Industrial average was up a healthy 7.6%. Since then, we have experienced a small correction, recover, and a large corresponding dose of volatility.
Lutts had the following thoughts about the upcoming year:
- He highlighted the amount of innovation apparent recently in the U.S., deemed the “Silent Revolution”, visible in the increasing amount of patents granted this year so far.
- Inflation should continue to be low, spurning growth and innovation. US GDP should be around 3% in 2015.
- Risks to continued growth include geopolitical risk around the globe, currency devaluation (see recent Russian woes), and an increasing money supply leading to increased inflation by 2016.
- He see increasing stock market volatility, and the possibility of 3 corrections in the 5% range and 1 correction in the 10% range.
- The S&P should see a positive 10% return this year on 19 times earnings valuation. Some sectors (health diagnostics, some energy) should see +20% returns.
- He was neutral on large foreign companies (besides some emerging markets like India and Africa), neutral on real estate investment trusts, and negative on the prospect of bonds for 2015.
Caruso concurred on most of Lutts’ points, and also added a few points:
- Although the market has been up significantly over the last 5 years, the average investor’s return is only 3% over a 5-year rolling average time frame due to them pulling out at the wrong time (hire a financial advisor!).
- He sees opportunity in emerging markets stocks, high yield bonds, and global bonds.
- Although the savings rate has increased to 5%, only 30% of the U.S. is actually savings money.
- He also sees a robust return for 2015 for the U.S. stock market in the 10-15% range.
- Sector opportunities will be seen in consumer discretionary and biotech.
I found both speakers to be bravely positive on the stock market despite the long run we have had since the crises correction in 2008. I agree that many investors are often wrong and pull out of the market when indicators tell otherwise. My rebuttals and/or agreements to their comments are summarized as follows:
- I believe that energy prices will continue to slide along with unemployment, bolstering consumer confidence.
- Interest rates staying low, but ticking up towards the end of 2015.
- Foreign developed markets re-visiting languishing growth rates and other headline risk, keeping foreign markets down and increasing volatility abroad significantly.
- U.S. real estate market continuing to recover, bolstered by low rates and the build up of demand from the Millennial generation.
- A recovery of small caps and mid caps to be more aligned with broad U.S. stock market returns in the 7-10% range.
- An end to strong bond market returns, and a need to diversify into floating rate and international bonds. Be cautious of high yield bonds!
- Increasing volatility as investors get skiddish about geopolitical flare ups.
Brian T. Eddy, MBA, CFA, CFP(r)