With little fresh news during the holidays and many pros on vacation, I expect a time of reflection and prediction. Publications hungry for content and TV producers needing to fill slots will highlight forecasts of any and all flavors. This happens every year, but the mid-week holidays are pushing it a little earlier than usual,

It is time to start the pundit forecasts for 2015!

Prior Theme Recap

In my last WTWA I predicted continuing focus on oil prices with special attention to whether the crash would affect Fed policy. This was one of my best forecasts, despite the two-part complexity. Declining oil prices dominated the news and weighed upon stock prices until the Fed announcement, when we saw a sharp change. When it comes to getting the story with one picture, it is tough to beat Doug Short's weekly snapshot (with plenty of additional interesting charts in the post). Doug notes that the two-day rally was accompanied by strong volume.

 

 

Whenever we see a period like the last two weeks – a sharp decline and a sharp rebound – it is natural to feel like you should have “done something.” I'll comment on that further in several of the sections in today's WTWA.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

A Personal Note

Some readers express concern when I miss a week with the WTWA series. I enjoy the dialog with readers and appreciate the interest. I should do better in announcing and updating my plans.

With that in mind, here is the current plan. I am not taking a year-end vacation since it is an important time for reporting and planning. Some of my team will be off to warmer climes! I will take an extra day or two to celebrate with family and I may not sacrifice the weekend day required for the regular WTWA post. I will change plans if there are important events. I am working on a year in review post as well as the “Year Ahead” contribution to the excellent annual series at Seeking Alpha.

This Week's Theme

We move from a time of increased volatility into the quietest period of the year. The trades still count, but there is less fresh news to consider. It is time for the financial punditry's annual exercise:

What is your market forecast for 2015?

There are several obvious camps which I am highlighting for future scorekeeping. A few have already weighed in, and those links are included. More to come!

Imminent crash. (Peter Schiff).

Correction ahead

Eric Parnell explains his ideas about how a bear market starts. He uses a number of two-variable comparisons of past markets, like this one:

 

 

A quiet year

Brian Gilmartin's earnings-based analysis, suggests that 5-10% would be a good year.

Modest growth

Dwaine Van Vuuren, whose excellent work we feature in our Quant Corner, has an interesting valuation model based “upon cyclically adjusted trailing SP-500 earnings.” He updates the forecast every quarter. The current valuation target shows a return of 8.5% from today's prices.

 

 

 

Significant gains

Tom Lee has been bullish and right in recent years. He sees a 15% gain, which he sees as a contrarian call versus most street estimates. Sam Ro notes that strategists have recently been 5% lower than actual results.

Last Week's Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

The news last week was very good.

The Keystone Pipeline is first on the GOP Senate agenda next year. While there is still the threat of a Presidential veto, I expect a successful bipartisan coalition and compromise. The overall effects on oil prices are difficult to parse, and the President downplayed the effect in his press conference this week. It will be perceived as market friendly and will have an immediate effect on jobs. It will also provide downward pressure on overall oil prices via reduced transportation costs. While the oil is not just for North America, it will be cheaper at that point. My environmentalist friends should note that I am not citing this as desirable public policy. I am merely sticking to my rules concerning what is “market friendly”.

FOMC decision. For some, this was not really news at all. Last week I provided a guide to the upcoming meeting, suggesting that many were following overly-simplified heuristics, especially the correlation of oil prices with stocks. Those with this mentality expected the Fed to react to the economic weakness implied by commodity prices rather than the trends in the actual data. As has regularly happened in the last few years, the economic Fed watchers did better than the traders, many of whom were “caught offside.”

An interesting example is the official PIMCO viewpoint contrasted with the recently-departed Bill Gross. Ben Bernanke, speaking to “the firm's internal forecasting session,” expects the Fedto look past the disinflationary evidence and begin to raise interest rates in mid-2015.

This was the clear message from the statement and the Yellen press conference. Confirmation comes from Bank of America via Myles Udland at business Insider, with “7 Things we Know” after the meeting. This is an excellent summary.

Confidence in the economy is higher. New Deal Democrat looks at three different surveys, emphasizing the expectations components. Check out the “surge in all three surveys.”

Cuba. Normalizing relationships might be controversial in the realm of international politics, but the move seems to be good for economic activity. The WSJ has five things you should know about Cuba's economy.

Leading economic indicators show continuing strength, up 0.6%. Steven Hansen at GEI has the full story – charts and analysis. Doug Short compares the result to the ECRI indicators.

Bullish sentiment is lower. This is favorable on a contrarian basis. Bespoke has the key chart.