We are now into the fourth quarter with only a little over a month to go before ringing in 2015. How time flies!
As outlined on January 11th (see Forecast 2014 – Part One) we believed this year would again defy bearish forecasts and see instead: a positive gain for U.S. stocks, a strengthening dollar, lower commodity prices, and improving U.S. economic growth.
Here’s how things have played out so far.
U.S. Stock Market
Year-to-date, the S&P 500 is up 10.84%, the Dow is up 6.69%, the Nasdaq is up 11.95%, and the Russell 2000 is down 0.51%. As highlighted yesterday, near-term risks of a pullback have increased (see story), but will likely be mitigated by favorable consumer trends heading into year-end.
Dollar
Our forecast for a strong dollar was put to the test for the first part of the year. It then bottomed in May and took off after making a higher low in June. Year-to-date, the dollar is up 9.29% and appears to be consolidating its gains.
Commodities
Similar to the dollar, commodities didn’t align with our forecast for the first part of the year before making a strong reversal about mid-year. This is partly a reflection of dollar strength and partly a reflection of weakening global growth. Taken together, the broad-based commodity tracking index DBC is down 16.87% year-to-date.
U.S. Economic Growth
Our outlook for economic growth, both for the U.S. and abroad, is largely informed by a wide array of leading (forward-looking) economic indicators. Long-time listeners of our podcast, Financial Sense Newshour, and readers of the site should be quite familiar with our reference to the “LEIs” (leading economic indicators) as to whether or not the world’s largest economy faces the risk of a slowdown, recession, or a pick-up in growth.
As we explained heading into this year, the majority of LEIs were positive and indicated the risk of a U.S. recession was quite low and that we’d see continued economic improvement for at least the first part of 2014. Looking back, this played out as forecasted and the LEIs have maintained their positive direction since. Here we present the Conference Board's Leading Economic Index (in red, S&P 500 in black), which suggests the economy will continue to improve into early 2015. (Note: forward-looking economic indicators tend to lead or confirm major peaks and bottoms in the market, as you can see below. Red bars mark recession.)
Outside of 2014, two other major themes that we’ve continued to reiterate for many years now (and have not yet changed our view on) are the relative attractiveness of both the U.S. and large-cap dividend paying stocks in a low interest rate environment. Until U.S. interest rates see a moderate increase and leading economic indicators begin to weaken or reverse trend, we will continue to reiterate these two larger themes.
