Equity market returns are going to be flat in 2015, says Jim Bianco of Bianco Research LLC. Bloomberg’s own estimate for earnings-growth is down to 6.5 percent – the lowest level since the Great Recession ended in 2008, instead of the usual 10-11 percent.
On top of that, almost every guess at the beginning of the year is too high, so it’s probably going to come even lower than 6.5 percent. Bottom-line: earnings are not going to be good this year and the estimates are for a very poor earnings year.
Additionally, if the Fed raises rates – which they are unlikely to do, but if they manage to raise rates, falling earnings expectations and elevated rates would be a cocktail for poor stock market, he observed.
Asked to comment on his estimates for the stock markets in 2014, Jim said he expected returns ranging between zero and down five percent, which was kind of correct before the fourth quarter rally.
Actual returns for 2014 came in at about 11.5 percent. Asked what could possibly force him to change his mind for 2015, Jim said if the economy made a strong comeback and earnings beat estimates on the upside with a forward P/E of about 17; that should be enough for the stock market. It could go higher, but then it will land up in the over-valued range. However, all the estimates for earnings are going in the wrong direction – earnings are going to go straight down, he argued.
Asked if the Fed is likely to raise interest rates this year, Jim said the Fed is wide open at what they could do. Admittedly, the minority opinion is that the Fed is driven a lot by the financial markets. The Fed embarked upon QE-2, Operation Twist, QE-3 etc because they were all preceded by a giant stock-market decline of at least 10 percent. If stock markets were to get a correction of 10-12 percent in the first-half of this year, any rate-hike probability will be off the table.
When the markets fell 7 percent in October, Jim Bullard talked about continuing QE. The Fed is driven by financial markets; should they show volatility and some sort of correction, the Fed is going to reverse themselves.
A lot of economists may disagree with that, but the history of the last five years show the Fed follows the markets. The monetary policy is nothing but an emotional reaction to events in the stock markets, he noted.
Most of the large central banks across the world have either embarked on loose monetary policy or are about to launch one. Asked if excess liquidity in Japan, Europe and China will affect US asset prices, Jim said US stocks will struggle because of problems overseas.
Japan is in recession, the European Central Bank is going to announce the launch of quantitative easing soon – though nobody knows for sure whether it will work, and China is struggling as well.
Economists have deftly gone from: 45 percent of S&P 500 earnings come from overseas, which used to be the bullish case when the dollar was weak, to only 13 percent of exports is GDP, which is now what they say when the dollar is strong.
But the fact of the matter is that 45 percent of revenues for S&P 500 companies come from rest of the world, and the rest of the world is not doing very well. That is going to be problematic for the equity market going forward.
The US equity market will probably get some safety-trade due to QE programs started/about to start overseas; otherwise returns would have been negative. But QE programs in Europe or Asia will not be enough to offset the global problems, he concluded.
You can watch the video here.
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