A “Santa Yellen” Market Rally to Close Out 201412-23-2014 |
While many stock market strategists were calling for some form of a Santa Claus rally to close-out the year of 2014, it looks like the credit for this year-end rally, at this point, should perhaps go to Federal Reserve (“Fed”) Chair Janet Yellen as opposed to jolly old St. Nick himself. While we would contend that the Fed really did not alter their stance significantly following their most recent meeting, the market clearly received a different signal. In her press conference following their Federal Open Markets Committee (FOMC) meeting on December 17, Yellen suggested that the Fed would be “patient in beginning to normalize the stance of monetary policy” and would likely not consider raising interest rates until after “a couple of meetings” in 2015. The U.S. stock market skyrocketed after these statements were broadcast as some were fearing that the Fed might suggest that they would consider raising rates sooner and perhaps applying a brake to a U.S. economy that continues to try to find its footing. The Dow Jones Industrial Average and the S&P 500 Index both had their best days of the year as a result on 12/17/14 and 12/18/14 respectively.
A closer examination of the Fed comments and our earlier forecasts at Hennion & Walsh in this regard, reveal that outside of the actual verbiage used, there were no material changes. In our blog post on October 27, 2014 entitled, “Fed Interest Rate Target Increase by end of 2016”, we provided the below potential timeline of Fed activity, as a result of what we know, based upon what the Fed has communicated and what we contend, in addition to current economic data reports and forecasts. (Please note: 2016 FOMC meeting dates are projected and not confirmed.)
You will see that we have already built into our projected timeline a two meeting reprieve early in 2015 with respect to the first potential interest rate hike. Once this initial rate hike occurs, we still contend that the Fed will likely follow the same blueprint that they followed between 2004-2006. During this time frame, the Fed gradually tightened, through interest rate increases, in 25 Bp (i.e. 0.25%) increments over several years. All of this, of course, depends upon the U.S. economy continuing to show signs of consistent growth in the months ahead to allow the Fed to feel comfortable beginning their highly anticipated tightening process.
While some (perhaps a majority) of this year-end rally can be attributed to the market’s reaction to recent comments from the Fed, we believe that the following factors also had a positive influence:
- A realization that the U.S. sits as the “shiny city on top of the global economic hill” and thus has more perceived relative value and upside potential, over the short-term, to investors.
- Lower gas prices providing short term benefit to the stock market and economy overall seeing that consumer spending still accounts for approximately 70% of U.S. gross domestic product (GDP) and the extra disposable income in the pockets of U.S. consumers can not only improve sentiment but also translate into an increase in holiday season purchases.
Given the gradually firming foundation of our U.S. economy, the difficulties currently being experienced within other international market economies and the activist nature of the Fed, we find more rationale to support further upside potential in the U.S. stock market beyond this year-end rally than a significant market downturn. Our contention is that we are currently within the midst of a longer term secular bull market with a secular bull market being used to describe a period when the overall trend of the stock market is “bullish” longer term, lasting between 5 and 25 years. During secular bull markets, stocks tend to rise in price more than they fall in price with the declines being less significant and offset by the subsequent increases in prices. To this end, we believe that March 9, 2009 marked the beginning of this most recent secular bull market, meaning that we are approximately 9 years away from reaching the average secular bull market cycle of 14.7 years (see chart below).
Historical Secular Bull Markets
Time Period Duration (in years) 1815-1835 20 1843-1853 10 1861-1881 20 1896-1906 10 1921-1929 8 1949-1966 17 1982-2000 18 Average Secular Bull Market Length 14.71
Source: Gold-Eagle.com, “Secular Market Trends” article, April 29, 2014
Regardless, we recognize that past performance is not an indication of future results and do not dismiss the potential for intermittent periods of stock market volatility over shorter term durations. As a result, we, at Hennion & Walsh, feel that an appropriate investment strategy for this outlook would be to create (or maintain) a diversified, growth portfolio that could help investors navigate through a short term market pullback while still being positioned for the next leg of this bull market cycle.