2015: More bull ahead

What's in store for stocks after 2014's volatile end? More bull market, with global stocks up double digits in 2015. US politics and an unloved, growing global economy make markets primed for positivity.

As I detailed in November, the results of America's midterm elections combine with President Obama's lame-duck status to create a political sweet spot. Midterms mean gridlock, which stocks love but people don't, so gridlock's magic is a positive surprise.

Positive post-midterm returns are one of the few regularly recurring phenomena that don't get pre-priced - most see gridlock as bad, letting their personal ideology blind them to the market's reality. Very few people view the world without political bias. Hence midterm-year Q4s and the following Q1 and Q2 are each up 86.4% of history, far above the 67% frequency of positive quarterly returns overall. The 86.4% is coincidental, but the consistency isn't. It's gridlock.

Gridlock is also why year three of the presidential term is historically the political cycle's strongest, averaging 18.5%. Third years haven't gone negative since 1939, a -0.9% drop as Europe's World War II nightmare began. Stocks love gridlocked lame-duck presidents who can't do much - like Obama now. No radical new laws shifting property rights or creating winners and losers. Just beautifully boring.

Expect full-year returns to beat the pros

But sentiment hasn't caught on. Professional forecasts are just slightly more optimistic than for 2014 - averaging near 8% now for US stocks versus 6% then, once again clustering in the mid-single to low-double digits. As I wrote last January, when the pros clump timidly, markets tend extreme - up or down. I didn't foresee down then and don't now.

Expect full-year returns to beat the pros, just as the S&P 500's 13.7% return did in 2014. How wide the victory margin will be, you can't know today, but don't sweat it - you don't build a portfolio differently for a 30% up year than for 15%. Positioning should depend on where we are in the market cycle - in the second half of a big bull market - and the outlook for different sectors and countries, not expected magnitude.

Some say you should position for more volatility. Don't believe it - no one has any basis for predicting volatility or corrections, those sharp drops of -10% to -20% over a few weeks or months. Bull market corrections are normal. They can start any time for any or no reason and end just as suddenly. They are related to shifting, swaying sentiment - not fundamentals. We didn't get a full one in 2014, so folks expect one for 2015. Might happen! But it might not. Prepare emotionally so you don't react if a correction comes! But don't make a portfolio bet either way. Just think longer-term - riding corrections out is the price we pay for big bull market returns.

Horizon looks largely clear

Bear markets - bigger, lasting drops driven by negative fundamentals - are possible to identify, but one isn't likely in 2015. Bull markets die two ways. Either running out of steam amid euphoric sentiment after climbing the wall of worry, or getting a brutal wallop no one sees coming. In a £48 trillion global economy, that wallop must be worth over £1.3 trillion in badness. Could happen, but the horizon looks largely clear.

The negatives are either widely discussed and thus discounted, too small, or too unlikely. That could change! But for now, this is time to relax and enjoy the ride. Euphoria isn't here yet. Using Sir John Templeton's great depiction, "Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria," we're in early optimism.

Fears persist, like a eurozone recession and China hard-landing. Don't believe it. The Conference Board Leading Economic Indexes (LEI) for both are rising. Choppy positive for Europe, up big for China. No recession in 55 years started with LEI high and rising. US LEI is high and rising, too. Ignore worries of Japan's recession going global and Greece taking down Europe. The world is growing. Time for stocks to party! So party on with stocks like these:

In November I urged diving directly into Chinese meltdown fears. So buy Agricultural Bank of China. Growth is impactful at China’s third-largest bank - with its clout in the urban-rural interface, where lending is moving fast via its 23,000-plus branches. Valuations are fine. The stock lagged for years with China's stocks. I like that. While waiting for gains you will be rewarded with a 5%-plus dividend yield.

Honda Motor stock has gone nowhere long term, with a very bumpy ride. Lately it's been bumpy-down - 22% in 2014. I bet it's soon bumpy-up. Honda grows moderately, is Japan's only carmaker that has net exports from America, has a great product line, and sports bargain valuations at 50% of sales, 1.0 times book value and 10 times my March 2015 earnings estimate.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.