As a rule, I’m not big on predictions – mine or anyone else’s. But I’m going to stick my neck out here, and say that the Dow Jones Industrial Average will probably blow past the 20,000 mark in 2015.
Feel free to disagree, but here are five reasons why.
Inertia – A Rising Stock Market Has Become the New Normal
Objects in motion, stay in motion – that’s inertia. And that’s been the direction of the stock market for almost the past six years – straight up with almost mathematical precision. It’s likely that that direction will continue for at least a while longer. And much of that has to do with human nature.
There is an entire generation of investors – most under age 30 or 35 – who have never experienced a significant decline in the market. To them, anything but a rising market would be abnormal.
Two major stock market slides since 2000 be damned, people have gotten used to a perpetually higher stock market. Investment and retirement plans are based on it, and people are investing their money into that expectation. That fresh capital by itself – invested with the unshakable faith that ultimately the market will always rise – helps to feed still higher prices.
Low Interest Rates
Near record low interest rates – the same catalyst that began priming the current bull market back in 2009 – continue in 2015. Despite warnings from the Federal Reserve that rates are heading higher, the reality is that they continue to bump along the bottom. Investors have come to expect as much, and stocks have continued to press forward.
Low interest rates don’t just fuel the economy. Since fixed rate, interest-bearing investments compete directly with stocks, the fact that rates have been so low means they really haven’t provided much competition. Investors are far more likely to bet on double-digit returns in the stock market, then they are to sit on cash earning less than 1% per year.
Unless the economy takes a serious fall in 2015, which no one currently expects, it’s perfectly reasonable to expect that the low interest rate environment will continue to fuel higher stock prices.
Low Oil Prices
This is a catalyst that wasn’t even remotely expected a year ago. But oil prices have fallen by something on the order of 50% since the middle of 2014. While that may be bad for energy-related stocks, it’s a boon to the rest of the economy.
Lower oil prices mean lower prices for energy in general, and since virtually everything in the economy involves the use of energy, general levels should soften. This will put more money in the hands of consumers, which should increase sales and profits in almost every other sector of the economy except energy.
Because oil is so pervasive in the economy, lower oil prices act as an across-the-board income tax cut. It means that just about every household in the country will have at least a little bit more money to spend on things other than energy. That’s a plus for the stock market.
A Lack of Investment Alternatives
Wall Street shattering records has drawn a lot of attention over the past few years. But less well noticed and appreciated is that almost everything else has weakened. Not only are interest rates near record lows, making interest-bearing investments less desirable, but commodities have tanked, and even real estate remains surprisingly soft given the record low interest rates.
What it means is that stocks have been something close to the only game in town, at least on a consistent basis over the past six years. Virtually every other investment class has gone through some sort of boom/bust cycle during that same timeframe. Stocks are not only outperforming other assets, but they are doing so on a more consistent and predictable basis.
Because of that, the typical investor has developed a preference for stocks over other asset classes. It’s a situation that is not likely to change quickly, particularly if stocks continue to avoid even minor corrections, as has been the case for the past few years.
The Fed Is Putting Out All the Fires
This factor is the most controversial, at least in part because not everybody believes it to be completely true. But ever since the financial meltdown began in 2007, the Federal Reserve has acted consistently to intervene in any and all trouble spots to minimize the worst of the negative impact.
Whether you agree with this activity or not, it is now built into the expectations of investors everywhere. Where in previous decades various events might have toppled the market, investors today are content to ride out any bad news with the full expectation that the Federal Reserve will put out any fires that might threaten the progress of the market.
I certainly don’t have a crystal ball, and I’m making the Dow Jones 20,000 prediction based more on the trend than on any kind of gut feeling. For all the factors listed above, the market seems hell-bent to pass the 20,000 mark this year, and maybe even go well beyond.
Where do you think the market will head in 2015?