This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by K. Sean Clark, chief investment officer of Philadelphia-based Clark Capital Management.
The U.S. stock market finds itself in rare territory as we enter 2015. For only the sixth time in the past 150 years, the U.S. stock market has registered a double-digit gain for three consecutive calendar years, from 2012 to 2014.
We enter the New Year with an overall bullish view, but it is no layup, and there are a number of risks that could derail the market’s historic run. Over the long term, we believe we are in a secular bull market in stocks, and that helps to give a framework around where we see opportunity and risks.
Historical tendencies suggest 2015 could be a very good year. However, it’s hard to get overly bullish given the many risks we see on the horizon. For example, since 1875, the S&P 500 has only rallied seven-consecutive years once—from 1982 through 1989—when it advanced for eight-consecutive years.
The current bull run is almost six years long, and much older than the 3.8-year average of bull markets dating back to 1932. In addition, with the S&P 500 trading at a price-to-earnings ratio of 18, multiple expansion seems unlikely, and further gains will largely depend on earnings growth.
Economy Is Strengthening, But Risks Are Higher
Fortunately, valuations can remain stretched for extended periods and we do expect another positive year of earnings growth on the heels of a strengthening U.S. economy. We expect U.S. economic growth of 3.0 percent, which would be the strongest annual growth rate since the recession, while the global economy should grow by about 3.5 percent.
The major drivers of returns for the market in 2014 were a continued improvement in the U.S. economy, a commodity collapse and the ending of quantitative easing in the U.S. Performance in 2014 was very mixed, and dominated again by large-cap U.S. stocks.
The S&P 500 Index gained 13.66 percent, giving the impression that 2014 was a banner year for stocks. However, a closer examination shows that most markets struggled in 2014.
The average stock in the Russell 3000 Index was up only about 4 percent and the median stock was actually down! U.S. small-cap stocks were only up 4.89 percent, international markets declined across the board, with the MSCI EAFE Index down 4.22 percent and emerging markets losing 2.11 percent.
The return profile in 2014 was so mixed that investors who prudently diversify may feel like they missed the boat. The average broadly diversified portfolio was up in the 5 percent range.
Market Highlights From 2014
Some interesting facts about last year that highlight the disparity of returns across asset classes:
- S&P 500 up at least 10 percent for third year in a row. That’s the longest streak since the five-year streak of 1995-1999.
- Largest S&P 500/EAFE performance spread since 1997
- Largest Russell 1000/2000 performance spread since 1998
- U.S. dollar had its best year since 1997
- S&P GS Commodity Index second-worst year on record