Managing Great Expectations


Recent memory often sculpts our expectations. And right now, recent memory appears to be shaping two competing market narratives of how the future could unfold.

It won't be long before the market crashes again

Doom and gloom has always been a profitable business model for soothsayers. They have a particularly receptive audience right now, considering the trauma of 2008 remains lodged in many investors' consciousness.

There are some legitimate concerns. Overseas, investors must contend with China's slowing growth, Europe's persistent malaise, and Russia's warning that it will slip into a recession in 2015. In the U.S., investors wonder how stocks will react once the Federal Reserve begins lifting interest rates. The Fed has emphasized that its actions will be dictated by data, not dates. It seems increasingly encouraged by the U.S. economy's progress, especially with the tailwind of lower oil prices.

Even in a healthy market, there is rarely a shortage of reasons to not invest. And that creeping fear of another disaster is an important factor for keeping market expectations in check. Bullish sentiment among investment newsletters and individual investors exceeds long-term averages, though neither appears overheated. Equally important, a wide swath of the U.S. population remains distrustful of the stock market. If stocks keep marching higher, some of those on the sidelines could capitulate, pushing stocks higher still.

Stocks will rally into year-end — just like last year

Bullishness prevails among most investors, with many seemingly unable to look beyond this seasonally favorable period. Last year the S&P 500 Index rallied 2.3% in December, exceeding its average 1.5% gain for the month since 1928, according to Yardeni Research. The S&P 500 has risen more often in December than any other month since 1928 — up 64 times out of 86. January, up 55 times, ranks second. Of course, the market can cruelly disappoint when an event becomes widely expected.


A pullback would not be surprising. Still, we recommend you remain focused on your long-term goals — not adjusting strategies for what may happen in a three-week time frame.

We are maintaining a nearly fully invested stance, with our buy lists having 91.9% to 97.2% in stocks. The Dow Industrials and Dow Transports both hit new highs in late November, reconfirming the bullish primary trend. With 51% of New York Stock Exchange stocks trading above their 200-day average, participation in the rally is fairly broad.

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