A Precise Stockmarket Forecast

An earlier article of mine  (in Moneysense magazine) stated that 2014 seems to be continuing the upswing in the stockmarket.It also reported that 2015 may be a time to cautiously move out of stocks and into the bond market.But the 10 year bond rate will not be that low.The bond rate has not fallen well below the yield on quality stocks.The bond rate has not "tanked".This time there may not be a huge switch into the bond market to get forthcoming gains.In addition, bond rates  will be heading upwards but bond prices will be heading down. There will not be capital gains here but capital losses.Consequently the best strategy may be to stay in the stockmarket but be more selective about the kind of stocks you purchase and stay with.
                    What kind of business cycle are we in?
  Economic textbooks are full of descriptions of business cycles being 5 to 6 years in duration and having a "V" shape.Down for three years and and up for three to four years.The growth rates are 4 to 6% each year thus giving the "V" shape.Recent business cycles are longer in duration and dampened; they have annual growth rates of 2 to 3.5%.They are referred to as having a "U" shape.It is likely that the economic growth rate will be only 2% in 2015.But there is little incentive to jump into the bond market as interest rates move up bond prices will move down and there will be a capital loss not a gain.Interest rates have been kept down as a government incentive to spur on more economic growth.
 The key indicators for whether we will still have a diminished bull market or a slight bear market are the economoic growth and the shape of the "U" curve.Since we are expecting there to be a 2.5% growth and a continuation of the "U"curve,there is a high probability that there will be a diminished bull market in 2014 and early2015.These two markets will move together.And since the bond rate is low at 2.5% because of interest rates the bond rate may rise but bond prices will fall.If bond prices fall then there will be capital losses not gains from investing in the stock market.Capital will not move in large volumes to the bond market and the stockmarket will likely continue upwards albeit at a slower pace. At first it will be difficult to tell if the market has turned downwards or not but the downswing will not likely continue. Money will come back into the stockmarket to reap future gains and not switch into the bond market.Dividend yields will remain the same or above yields.Economic growth has not yet turned down and earnings will still rise although not as robustly as before.
           Fine tuning
   So we have estimated the overall trend of the stockmarket for the rest of 2014 and early 2015 but what will the short term changes be?This can be measured by changes in the interest rate.The indicator that is used here is the 10 year government bond yield.It is presently earning a 2.01% rate of interest.The Governor of the Bank of Canada does not seem ready to change the interest rate and any changes will likely be in the second half of 2015.Changes here will be slow and small.But it is widely expected that the Federal Reserve may make a change before this time.Growth in USA has been solid but a large or fast move may slow their recovery.Some experts are predicting a small change in the  fall of 2015.That will certainly depend on what the annual growth is for 2014.But any change here is very likely to influence Canadian interest rates.
 The theory is that the 10 year government rate will respond first and move almost in lock-step with the change in the bank rate.The short term rates will follow but not by the same amount and it may take awhile to change.The longer term rates,such as the 20 year and 30 year ,will be affected by macro factors such as American and European rates and will move slower and not by as much.Other factors such as long term earnings forecasts will cause the long term rates to move more or less than the original change.Long term rates are seen as an indicator of future changes in the 10 year government rate and hence stockmarket swings.Long term rates have moved  up slowly since the summer and are predicted to move up in advance of the coming raise in the bank rate.
 Once this change occurs the stockmarket will take this as an indicator and any upward movement will be forestalled.Gradually the market will move sideways or even downwards. This will depend on the strength of earnings.This will also make dividend yields more attractiveand act as another incentive to switch into the stockmarket.At the minimum this will be a short term bear market within a prolonged bull market.But unexpectedly slow growth in earnings in this quarter will presage sideways movement in the stockmarket until earnings pick up.Forecasts are that earnings will be greater than the 2.5% economic growth.The best forecast for the rest of the year will be for a slight increase in the stockmarket as a whole and better than average increase for select stocks.The best stocks (like always) will be those with an increase in earnings and dividends but a constant dividend payout and above average growth in earnings should also perform well.