News & Our Thinking

(St. Louis Post Dispatch)

If those forecasts come true, Ken Crawford thinks investors will have another good year. “There is strength in the economy that is not reflected in the stock market,” says Crawford, a portfolio manager at Argent Capital Management in Clayton.

January 4, 2015 (David Nicklaus)

If you’re the sort of person who knocks on wood after saying something optimistic, keep a block of oak handy when you review your stock portfolio.

The Standard & Poor’s 500, an index of large-company stocks, delivered a 13.7 percent return last year, including dividends. That was the market’s sixth calendar-year gain in a row, with double-digit returns in five of those six years.

If this bull market lasts until mid-January, it will become the second-longest in U.S. history, ahead of the Roaring Twenties and behind only the 1990s.

Those eras ended, respectively, in the Crash of 1929 and the bursting of the technology bubble. Most investors don’t want to repeat either experience, so human nature makes us worry when things have gone so well for so long.

Market experts aren’t among the worriers. Dan Heckman, a senior strategist at US Bank in Kansas City, says this bull’s age doesn’t tell us anything useful about how much further it might run.

“Typically, bull markets don’t end unless they are ended by a recession,” he says. “We had a severe economic contraction (in 2007-09), and we certainly have not had an explosion in economic growth since then. Perhaps the new normal will be steady but below-trend economic growth and less of a boom-and-bust cycle.”

Almost no one, he adds, expects a recession in 2015. The consensus among forecasters is that growth should even pick up a bit, with unemployment continuing to fall and workers finally seeing some wage increases.

If those forecasts come true, Ken Crawford thinks investors will have another good year. “There is strength in the economy that is not reflected in the stock market,” says Crawford, a portfolio manager at Argent Capital Management in Clayton.

On a day-to-day basis, traders seem to fixate on pronouncements from Federal Reserve officials. The market falls on any hint that the central bank may raise interest rates sooner than mid-2015, and rises when the Fed sounds more patient.

Such short-term trading ignores the economic backdrop to the Fed’s decision.

“It’s not like the Fed will raise rates for no reason,” Crawford says. “An increase would be a positive sign because it would show that the Fed thinks the economy is doing well.”

The end of the Fed’s bond-buying stimulus program was a major worry a year ago, but it happened without hurting stock or bond investors. The 10-year Treasury note yield, a benchmark for long-term interest rates, was slightly lower at the end of the year than the beginning, defying forecasters who thought it would rise sharply.

When the Fed moves short-term interest rates up from zero — where they have been since 2008 — it might turn out to be the same kind of nonevent. Or, it might not.

“We think the interest rate change is the key event of the year,” says Mark Keller, chief investment officer at Confluence Investment Management in Webster Groves. “If they overdo it, which will be easy to do, it could have a negative effect on the market.”

Every statement from Fed Chair Janet Yellen, however, emphasizes caution. She can delay the initial rate increase if there’s any hint of crisis in the world economy. The Fed also could push rates up just a tiny bit, to maybe 0.5 percent, and make clear that it won’t do more until it sees how the economy reacts.

Keller believes even a small increase in mortgage and credit-card rates might have an outsized effect on consumers, who have been steadily trying to reduce their debt load since 2008. If the Fed is sensitive to that effect, it is unlikely to raise rates too quickly.

That debt-sensitive consumer may be the biggest difference between today and the 1920s or 1990s. In those earlier periods, optimistic consumers didn’t mind taking on debt. The foreclosure crisis erased that optimism for today’s generation.

If consumers can’t borrow to buy more of what corporate America is selling, profit growth will be modest. So, too, will the rise in stock prices, but Heckman thinks investors can still see decent gains.

He does the arithmetic this way. Take an economy growing at 3 percent, add 2 percentage points for inflation and a couple of percentage points to account for stock buybacks, and earnings per share could grow by 7 percent to 9 percent this year.

That’s a realistic expectation, he says, for how much stock prices might rise. They could do a bit better if overseas investors, seeing America as an island of growth in a struggling world economy, allocate more money to the U.S.

A single-digit move for 2015 might sound disappointing after returns that averaged 20 percent over the past three years. At this point in a long bull market, though, any talk of further gains will make many of us rap our knuckles on a desktop.