MarketsMuse is pleased to re-distribute below thoughts courtesy of David Kotok, Chairman and CIO of Cumberland Advisors, the ETF-centric RIA:
US markets hit successive new highs in 2014. The economic recovery seems to stay on track while gradually improving and increasing its rate of growth. Labor-force-related problems seem to be healing at an improving pace. Inflation appears under control. Interest rates remain extraordinarily low. The federal budget deficit continues to shrink and is approaching 2.5% of GDP (gross domestic product). The deficit may reach $400 billion in 2015. Note that it was $1.4 trillion at its annual run rate in the worst quarter of the Great Recession in 2009.
This combination of gradual improvement, low interest rates, low inflation, and rising profitability has led the stock market to an incredible and unexpected run of success. Most of Cumberland Advisors’ US ETF (exchange-traded fund) related separate accounts have been fully invested most of the time. The results speak for themselves. Cumberland Advisors’ clients are familiar with the actual outcome.
In 2015, we expect the stock market to confront less easy conditions. US economic growth rates are picking up. That’s good for stocks. There is only a minor threat of upward movement in inflation and the upward threat is still only a threat. That’s good for stocks. Interest rates cannot go any lower, and they may begin to work their way higher as the year progresses. But they are likely to remain very low. That’s good for stocks. We do not expect any recession in the US. That’s good for stocks. We (the United States) are benefiting generally from the very low oil prices that are now spreading throughout the world. That’s good for most stocks (not energy). Low energy prices should encourage more economic activity in the US as American households begin to raise their consumption levels. That’s good for stocks except for the energy sector.
Our outlook for 2015 and 2016 is positive but tempered. We do not expect the stock markets to continue to rally with the momentum that has been in place for the last two years. Double-digit returns year after year are unlikely to repeat in year three and are very rare for four successive years.
A more tempered US stock market outlook for the rest of the decade suggests something along the lines of a mid- to high-single-digit compounding rate. Whether that is 4% or 8% remains to be seen. A low compounding rate in single digits is an attractive investment return in a low-interest-rate bond climate. We expect bond interest rates to work their way slightly higher over time as the US economy continues to improve. Absent a shock or an inflation flare-up, rising interest rates will reflect better economic conditions. We do not expect interest rates to spike wildly higher.
We are bullish for the rest of the decade and anticipate a compounded single-digit rate of return for the US stock market. A longer term target for US stocks at the end of the decade is 2600 to 3000 with end of decade estimated annualized earnings for the S&P 500 index between $160-$180. We end this year nearly fully invested in our separately managed US market ETF accounts. Our largest over weight positions are in two domestic industries, utilities and transportation.
For all of Cumberland Advisors’ commentary check out their website here and follow them on Twitter @CumberlandADV
