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January 1, 2005
Previous forecast (preliminary): December 13, 2004
A lot of the issues for 2005 are quite clear even though the final disposition of those issues is quite murky.
Sure, there are lots of risks, but there is also lots of potential. Ultimately, the net result will be "the sum of all curves" as we add up all the good things that happen and subtract all the bad things and see where it all nets out.
Unfortunately, there is a lot of negative sentiment out there and 2005 could turn out to simply be a "wait and see" year as we incrementally slog through the issues before us.
There is still a lot of chatter about stocks and the market being overvalued, but there are also people who have different ways of looking at the same data and differing opinions of the outlook for the economy, corporate revenue growth, and corporate earnings over the coming year and beyond. As a general rule, the stock market will tend to look ahead 3, 6, 9, or even 12 months. About all we really know for sure is the economic growth will be uneven, revenue growth will be uneven, and earnings growth will be uneven, but all three will probably be trending up over the full year. Each company will have its own quirky path through this uneven landscape, with some companies stumbling or even failing even as others zoom ahead. We’re bound to continue to have some soft patches in 2005 as different parts of the economy catch up at different speeds and sometimes pause to digest prior rapid growth. While earnings growth is a key factor in determining stock prices, perception of future earnings growth is also a key.
But as important as earnings are, it is ultimately the law of supply and demand that will determine the path of stock prices. Money flows in or out of stock mutual funds will be a key factor in the market trend. Despite the mutual fund scandals, inflows have continued, albeit at a more subdued pace. Mutual fund inflows may pick up more strongly as employment, income, and 401(k) contributions rise. Foreign money flows are a wildcard, but most of the conservative foreign investors have probably stayed away so far anyway, so there is little reason to expect much in the way of foreign outflows from U.S. stocks, despite all the chatter about the dollar and the trade and federal budget deficits.
Some stocks will zoom ahead on anticipation of future recovery and others will lag until investors are convinced that earnings are really sustainable. Some stocks will fall victim to the traditional “buy the rumor, sell the news” maxim and do well in anticipation of earnings improvement and then falter and decline even as strong earnings finally become realized.
Part of the rise or fall of stock prices in any short period is due to the “trading froth” caused by traders and short-term speculators who push the market up further than its core trend or below that trend, but this trading froth will tend to reverse and swing the other way within months, weeks, or sometimes even days.
The single most important thing to remember about the stock market outlook is simply: It's the economy, stupid! Or, more precisely, it's the collective expectations for the economic outlook 6 to 15 months down the road.
There is quite a bit of chatter about any number of allegedly looming crises. None of them will transpire in 2005. There's an old saying: It's the lightning strike that you don't see that kills you. Yes, we could have a crisis or two or three, but they won't be anything related to anything that the chatterers are currently chattering about.
There will probably be at least three or four or five occasions during 2004 when the "volatility crowd" (cynical traders and speculators who seek to make a quick buck by shorting stocks and conning you into panicking and dumping your long positions) will be able to incite a mini-panic and cause a minor market correction, but in each case sanity will prevail and sentiment and the market will quicker bounce back and push to an even higher high.
There will also be any number of days when the volatility crowd gets all excited about some apparently negative news item or rumor and manages to incite a one or two-day panic that evaporates as quickly as they conjured it up. A week later and the incident and its alleged dramatic implications will be completely forgotten.
The market and the economy are extremely robust and resilient and able to withstand tremendous shocks, and are not as fragile as the cynical volatility crowd would have you believe.
Here are some of the popular crises that won't happen in 2005:
Even in the strongest of bull markets stocks rarely go "straight up" for more than a few months without some sort of "correction". We should expect at least one correction in 2005 of at least 10% or 15% or even 20%, and possibly two or three or four as the year progresses. A strengthening economy will cause some significant stock market gains, but that opens the door to even more sharp corrections whenever the market "gets too far ahead of itself". Traders and speculators seek to make money off these corrections, but true investors can simply ignore them.
It's also very possible that we could see another economic "soft patch" or two or three in the coming year, and each such patch will invite its own stock market correction.
The major market indices could end 2005 up or down for the year. From it's 2004 ending level of 2,175.44, Nasdaq could end down as much as 30% (to 1,522) or up as much as 60% (to 3,480), depending on the evolution of the economy. The midpoint of that range is 2,501, or a narrow range of 1,800 to 2,800. If you have to press me, my single-point target for Nasdaq is 2,610, a 20% gain.
Updated: January 01, 2005 02:38:53 AM -0500
Copyright © 2005 John W. Krupansky d/b/a Base Technology