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A rundown of the top index funds sets the stage for an orderly approach to forecasting and investing in the stock market. The leading benchmarks of the bourse are found in the Dow Jones Industrial Average, the S&P index of 500 giants, and the Nasdaq yardstick of 100 heavyweights. For these beacons of the stock market, the tracking vehicles take the form of DIA, SPY and QQQ respectively. The major milestones and likely moves for each of the exchange traded funds are sketched out in detail for 2015 and beyond.
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Forecast of Top Index Funds
for
Investing in the Stock Market
Outlook for 2015 and Beyond
for the
Leading Exchange Traded Funds:
DIA, SPY and QQQ
2015 Edition
A Market Brief by
Steven Kim
MintKit Investing
www.mintkit.com
Disclaimer This brief is provided as a resource for information and education.The contents reflect personal views and should not be construed asrecommendations to any investor in particular. Each investor has to conductdue diligence and design an agenda tailored to individual circumstances.
2015 MintKit.com
2
Short Summary
A rundown of the top index funds sets the stage for an orderly approach to forecasting and
investing in the stock market. The leading benchmarks of the bourse are found in the Dow
Jones Industrial Average, the S&P index of 500 giants, and the Nasdaq yardstick of 100
heavyweights. For these beacons of the stock market, the tracking vehicles take the form
of DIA, SPY and QQQ respectively. The major milestones and likely moves for each of the
exchange traded funds are sketched out in detail for 2015 and beyond.
Extended Summary
A review of the top index funds sets the stage for a coherent approach to forecasting and
investing in the stock market. For this purpose, the vehicles of choice are found in the
exchange traded funds for the leading benchmarks of the bourse; namely, the Dow Jones
Industrial Average, the S&P 500 index, and the Nasdaq 100 yardstick. For these
touchstones, the tracking vehicles take the form of DIA, SPY and QQQ respectively.
By contrast to received wisdom, the financial forum is entwined with the real economy not
only in the future but also the present which happens to spring from the past. In view of the
jumbling, the shrewd investor has to examine the milestones in the backward direction as
well as the outcrops in the current environment in order to sketch out the conditions
downstream.
Moreover, the slant of the markets depends on the forces at work right now along with the
contours of the landscape downstream. For this reason the survey here draws partly on,
and fleshes out, the drivers at work over the coming year and beyond.
3
From a pragmatic stance, the companies listed in the stock market earn their living within
the economy at large. That much is true even in the case of virtual firms such as online
retailers and brokerage houses. As a result, the aggregate level of economic output plays
a vital role in corporate earnings and thus the price action on the bourse.
Within the tangible economy, the conditions have not changed a great deal over the past
few years. On the downside, the politicians of the West have gone out of their way to
solidify the distortions in the housing sector in the aftermath of the financial crisis of 2008.
Another bungle involved the prop-up of some of the biggest and most unproductive firms in
the economy. In particular, trillions of dollars round the world were handed out as bailouts
for a gaggle of gutted banks that had succumbed to their own reckless schemes.
To make matters worse, the struts put in place have prevented the property market from
shedding the mountain of blubber it had built up during the manic bubble in real estate
prior to the financial blowout. Due to the shackles in place, the economy as a whole has
been doomed to gasp and limp well into the 2020s.
In this shaky environment, the prospects for the industrial nations are lackluster at best. A
glaring example lies in Europe, which continues to wallow in the doldrums. Given the
torpor of the rich countries, the emerging markets round the planet will have to plod along
despite the general weakness of the world economy.
On a positive note, though, the U.S. is starting to recover from the disruptions stemming
from the housing craze in the run-up to the financial flap of 2008. The mangling of the
markets during the bubble was compounded by a welter of knee-jerk reactions by
impulsive politicians, as in the likes of lifelines for ruined banks along with crutches for real
estate. After stumbling for half a decade in the aftershock of the Great Recession, the U.S.
economy has finally taken the first tentative steps toward regaining its health for real.
In a nutshell, the outlook for the global economy is a mixed bag. For the world as a whole,
the volume of output should increase by about 3.0% this year after adjusting for the
pinch of inflation based on the official figures cooked up by government agencies. The
forecast for 2016 is marginally better, amounting to a growth rate of 3.3%.
4
In line with the norm, the developing regions as a group will contribute the lions share of
the increase in global output thanks to an upturn of 4.8% in 2015, followed by 5.3% the
next year. By contrast, the rich countries will muster a mere 2.2% this year before crawling
up to 2.4% in 2016.
On the financial front, the stock market faces a raft of challenges over the year to come.
Moreover, some of the biggest stumpers have nothing to do with the substance and reality
of the marketplace but everything to do with the perception and bias of the investors.
As an example, the Dow index will run into a huge obstacle at the nice, round number of
20,000 points. As things stand, this barrier will crop up by the summer. There are of course
lots of other factors that prod the market to the upside as well as downside.
As is often the case at the beginning of the calendar, the stock market is slated to thrash
around more than press ahead during the months of January and February. After the spate
of churning, however, the bourse should marshal enough energy to climb higher in
earnest.
On the upside, the first milepost for DIA also known as the Diamonds lies at the
$189.07 level. Based on current conditions, the landmark should be reached by the spring.
Shortly thereafter, the stormy currents of the summer will as usual throw the market for a
loop. Despite the tempest, though, DIA is slated to waddle higher by a modest amount. In
that case, the peak for the summer should arise around the $198 level.
After reaching the vertex, however, the Diamonds are unlikely to hold onto the summit.
Instead the market will fall back and flail around for a few months.
Unfortunately, the outlook is not much better as we move into the second half of the year.
For one thing, the market has a habit of floundering during the dog days of summer then
flopping with the gusty winds of autumn. More precisely, the bourse will enter its weakest
stretch of the year as September rolls around.
5
One negative factor for the stock market springs from the mien of the Federal Reserve in
the current environment. As a backdrop, the central bank decided in October 2014 to wrap
up the third and last round of quantitative easing. The act of partial restraint in money
printing will ratchet up the cost of credit in the financial forum as well as the real economy.
The step-up of interest rates should begin by the third quarter.
In line with earlier remarks, the Dow index faces a monumental block at the 20,000 level.
Once the benchmark reaches the blockade, the market is bound to break down. The
crack-up that ensues should amount to a mini-crash from peak to trough.
In the most likely scenario, the market will bump up against the landmark a couple of times
before breaching it on the third try. The travails of the Dow will of course be mirrored by the
labors of the Diamonds which will have to grapple with their own hang-up at the $200
mark.
The next hurdle lies in the perennial spate of upheaval in the autumn. Thanks to the
heaving and shoving of the madding crowd at this time of year, the Diamonds are destined
to trip up and fall flat by way of another near-crash.
After that knockout, the ground will be cleared for a push to the upside in the final stretch
of the year. After punching through the roadblock at $200, the next milestone lies a tad
higher at $210. The latter figure stands around 18% beyond the closing value of $177.88
notched at the end of last year.
Turning to the political front, 2015 happens to be the run-up to a Presidential election in
the U.S. As the winter rolls around, the air will crackle with the platitudes and promises of
politicos about the need to create jobs and lift incomes, furnish handouts and bolster
business.
The resulting spurt of busywork coupled with the bluster will kindle a wisp of hope across a
large swath of voters and imbue them a warm, fuzzy feeling. Moreover a spree of wanton
spending should in fact give the economy a boost over the short run despite the crushing
cost to be paid by the entire society over the medium range as well as the long haul.
6
As a rule, the financial forum anticipates the course of the real economy. For this reason,
the bourse in particular is poised to head higher this year.
The buoyant tone of the pre-election year, coupled with the sturdy uptrend of the bourse in
recent years, is a godsend for the investor. As a result, the Dow yardstick could end up
surpassing the projected target of 18% by a goodly amount. In that case, the gain in
percentage terms could reach well into the 20s.
On the downside, though, the main argument against a huge advance is of course the
precarious state of the economy. The chains of production and distribution were bent
severly out of shape during the riot of speculation in real estate prior to the financial crisis,
followed by the orgy of government spending and money printing in the years to follow.
Given the breadth and depth of the disruptions, the economy is only now starting to take
the first steps toward recovering in earnest from the abuse it received at the dawn of the
millennium.
A second reason for caution involves the fact that the stock market is already puffy and
overpriced to some degree. In particular, the average ratio of price to earnings for the
stocks within the Dow index has been lounging on the high side for years on end.
On the other hand, a pricey market can become even more pricey before it regains its
equilibrium. For this reason, the Diamonds could well enjoy a giddy ride to the upside by
this time next year.
In addition to the circle of 30 titans tracked by the Dow index, another leading benchmark
lies in a troupe of 500 heavyweights monitored by the Standard & Poors company. The
yardstick is tracked by an index fund which runs under the banner of SPY.
Meanwhile the third benchmark of the bourse deals with the Nasdaq market. On this
exchange, a broad-based yardstick known as the Composite Index is widely reported by
the financial media. On the other hand, a subset comprising a hundred giants is the
vehicle of choice from a pragmatic stance. The tracking vehicle for the latter touchstone
lies in QQQ.
7
This report examines the special aspects of SPY and QQQ which distinguish their
prospects from the outlook for DIA. Moreover a detailed forecast of each of the broader
benchmarks is provided.
To sum up, the trio of touchstones for the U.S. bourse will tramp onward and upward
through a series of zigzags as usual. The story will unfold in a similar fashion for the other
stock markets round the globe.
Although there are plenty of exceptions, the bourses in the budding regions often advance
roughly twice as much as the Diamonds or Spyders. In that case, an upswell for DIA
should accompany a strapping payoff for the emerging markets.
On a negative note, though, the feisty markets also tend to be the most flighty. To bring up
another bogey, the mass of investors remain somewhat skittish. As a result, the
international crowd may refrain from moving with gusto into the sprouting markets until the
end of the year or even later.
The task of forecasting this year poses a case study of uncommon complexity. For
starters, the forces at work include a host of routine drivers as well as wayward factors. An
example of a commonplace theme lies in fundamental facets such as business conditions
and monetary policies, or technical features as in multiyear trends and seasonal patterns.
To add to the muddle, though, a bunch of issues crop up only once in a few years or even
decades. An example of the former is the hefty impact of the political theater on the stock
market in the run-up to a Presidential election in the U.S. Meanwhile an instance of the
latter is the psychic barrier posed by a towering landmark that emerged in the midst of an
epic bubble on the eve of the millennium.
On the upside, the hoopla on the political front will infuse hordes of investors with hopeful
views regarding the prospects for the real economy along with the stock market. On the
downside, though, a gauntlet of mental roadblocks will hamper the madding herd and
prevent the market from gaining its stride.
8
As we noted earlier, an example lies in a hulking barrier for the Dow index at the 20,000
level. Another sample is a dual blow against the Nasdaq benchmark due to its historic
peak at 4,816.35 points formed at the height of the Internet craze, followed by a mental
block at the hulky landmark of 5,000 points.
Due to the lineup of blockers, the stock market is destined to thrash around even more
than usual during the second half of the year. Along the way the leading benchmarks of the
bourse will encounter a flurry of mini-crashes. The repercussions will of course be worse
for the minor leagues such as bantam stocks and emerging markets.
From a larger stance, the throng of international investors will continue to fret over the icky
conditions in the mature economies. An example involves the quagmire in Europe resulting
from the housing bubble, followed by a slew of witless policies ranging from the rescue of
braindead banks from their own rabid bets to the riotous spree of money printing by central
banks.
As we noted earlier, the buoyant forces that lend an upward tilt to the U.S. bourse will be
negated in part by a cluster of mental blocks. For this reason, part of the effervescence
should spill over into foreign markets. One beneficiary will be the European market whose
dire straits will be offset to some degree by an influx of funds from local investors as well
as foreign sources.
Another recipient will be the budding markets that have faltered for half a decade in the
wake of the Great Recession. On the upside, the emerging regions generate the bulk of
economic growth for the world as a whole. Sooner or later, a tidal wave of money will pour
into the lively countries in line with their superior performance in the real economy.
The inrush of mint could well begin this year. In that case, the bourses of the sprouting
regions will snap out of the funk of recent years and revert to their usual habit of outpacing
the benchmarks in the mature countries.
* * *
9
Keywords:
Forecast, Stocks, Financial, Markets, Economy, Investing, Investment, ETF, Exchange
Traded Funds, Outlook, Prediction, DIA, SPY, QQQ, Nasdaq, USA, Emerging, Europe,
Benchmark
10
* * *
A comparison of the top index funds lays the groundwork for an orderly approach to
investing in the stock market. For this purpose, the first step is to size up the leading
benchmarks of the bourse; namely, the Dow Jones Industrial Average, the Standard &
Poors Index of 500 titans, and the Nasdaq yardstick of roughly 100 heavyweights.
From a practical stance, the companies listed in the stock market earn their living within
the economy at large. That much is true even in the case of virtual outfits such as online
retailers, brokerage houses, and mutual funds. Regardless of the industry, the aggregate
level of economic output plays a vital role in the flow of earnings for the companies and
thus the fortunes of their equities on the bourse.
In terms of recent trends, the outlook for the marketplace as a whole has not changed a
great deal over the past few years. A deep-seated cause of the malaise lies in the
stumbling blocks thrown up by a host of governments in the wake of the financial crisis of
2008.
Since the financial flap along with the Great Recession, the politicians of the West have
gone out of their way to buttress the distortions in the housing sector. A second, and
related, botch lay in the prop-up some of the biggest and most unproductive firms in the
economy.
In this caper, trillions of dollars were squandered in the form of bailouts for a passel of
oversized banks. The insolvent firms were the very clods that had fomented the financial
crisis in the first place, then had fallen on their own swords after gorging on mounds of
mortgage-based assets.
To make matters worse, the struts put in place by the pols have prevented the property
market from casting off the mountain of blubber it had amassed during the berserk ramp-
up of real estate prior to the financial bust. Under normal conditions, the housing sector is
11
a prime engine of growth for the economy at large. Unfortunately, the throng of misguided
politicos have thrown up a heap of fetters designed to support the bulge of real estate.
For this reason, the shackled market has been unable to shed in full the grotesque flab it
had accumulated during the orgy of speculation in the run-up to the financial flap.
Not surprisingly, the economy as a whole has been unable to toss off the deadweight and
regain its vitality. As a result, the growth rate will remain stunted well into the 2020s.
Needless to say, the outlook for the year to come reflects the feeble health of the blighted
regions. As a direct offshoot, the pulse of economic output will scarcely budge from the
anemic levels seen last year.
On a positive note, though, the slowdown in the emerging regions has largely run its
course. As an example, China should play a larger role in expanding the global economy
in 2015 than it did last year.
In line with earlier remarks, however, the prospects for the industrial nations are tepid at
best. For this reason, the budding regions of the world will have to plod onward amid the
general weakness in the global marketplace.
To sum up, the outlook for the world economy has improved slightly compared to the
turnout last year. More precisely, we can expect the rich nations of the world to putter
along and crawl ahead by about 2 percent after adjusting for inflation based on the official
figures trotted out by government agencies.
In gauging the standard of living, however, the increase in economic output ought to take
account of the growth of the population due to net immigration into the wealthy countries.
For instance, a representative figure is an upturn in head count of roughly 1 percent a year
in a raft of countries including the U.S. In that case, a step-up of 2% for the economy in
toto comes out to a crumb of just 1% per person.
On the upside, though, the sprightly nations of the world are poised to fare much better. A
case in point is China or India, which will advance several times faster than the rich
nations as a group.
12
Thanks to the bloom of the real economy, however modest, the stock market is slated to
follow suit. The cheery outlook shows up in the upward slant of the top index funds over
the course of the year.
In the sections to come, we begin with a quick survey of forthright techniques for
forecasting the stock market. The vehicles in the marketplace respond to a slew of factors
ranging from the course of the economy to the mood of the investors. In that case, a lucid
approach to prediction ought to combine a multitude of driving forces in the real economy
as well as the financial forum.
The second item on the agenda involves a brief survey of the history and nature of the
leading benchmarks of the bourse. A couple of yardsticks have established themselves as
household names while other gauges are less familiar to the general public.
Our third task deals with a backward look at our forecasts from last year. A number of
predictions turned out pretty much as envisioned, while some others were off the mark.
A fourth function is to examine the outlook for the real economy over the next couple of
years. The realm of tangible goods and services serves as the background against which
the widgets in the financial forum play out their respective roles.
The fifth topic concerns the role of the central bank in revving up the real economy and
shoring up the stock market. The spree of money creation has a huge impact on the
prospects in the marketplace including the bourse.
The sixth aim is to examine the prospects for the index funds that track the leading
benchmarks of the stock market. In particular, each of the surveys maps out the likely
pathway over the course of this year and beyond.
The last section talks about the dangers of patchy and faulty information in the vale of
exchange traded funds. In a field racked by rapid change, the thoughtful player has to take
extra steps in order to scrounge up a smattering of trusty data to support a trenchant
program of investment.
13
Upward and Downward Modes of Forecasting
The techniques for forecasting the stock market fall into two broad groups: fundamental
and technical. Either type of methodology can be used to assess the prospects for the
panoply of instruments ranging from solitary stocks to compound benchmarks.
The fundamental approach deals with the commercial aspects of the business standing
behind a stock, along with their impact on the value of the equity. For this purpose, the vital
factors span the spectrum from the health of the economy in general to the outlook for
earnings for the firm in particular.
By contrast, the technical approach relies solely on the information available in the
financial forum. In this light, the primary factors lie in the history of prices along with the
volume of transactions.
Most of the players in the arena rely chiefly or entirely on one type of approach or the
other. On one hand, the fundamental approach is most useful for gauging the prospects for
the market over the long range. By contrast, the technical scheme is best suited for
predictions over the near term.
At a basic level, a share of stock represents a slice of ownership in the underlying firm.
The shareowner has a claim on the trove of current assets as well as the intake of future
profits. For this reason, the value of a share over the long haul depends for the most part
on the lot of the company in the real economy.
The prospects for a business tend to vary slowly over time. On the other hand, its equity is
apt to thrash around a great deal. For this reason, the fundamental approach is of limited
help in sizing up the prospects for a stock over the near term.
In many cases, the action in the stock market depends more on the mood of the investing
public than the outlook for the corporate sector. An extreme example crops up in the frothy
valuation of stocks at the height of a bubble or the firesale prices at the depth of a panic. In
14
between, the bourse has a way of flopping around in response to the shifting sentiments of
the madding crowd.
So what type of methodology should a serious player take up? The answer depends on
the individual circumstances of the decision maker. A case in point is the length of the
planning horizon along with the holding period for an asset under consideration.
On one hand, a gamer who plans to buy a stock and hold it for a handful of years or a
couple of decades can largely ignore the antics of the market over the short run. In that
case, the fundamental mode is the methodology of choice.
On the other hand, a punter who intends to take advantage of the gyrations of the market
over the span of a few days or weeks need not worry overmuch about the fundamental
factors behind a stock. Instead, the main concern should be a fitting choice of vehicle to
ride the transient waves in the marketplace.
In the process of evaluation, one crucial trait lies in the robustness of a candidate vehicle.
That is, the vessel should be a hardy rig that has a negligible chance of going bust all of a
sudden.
A second issue concerns the nature and extent of the swings in price. In the case of a
short-term trade, for instance, the asset should exhibit large swings to the upside and
downside in a regular fashion.
As it happens, myriads of players fall in the middle category between the hyperactive
trader and the aloof investor. A showcase is found in the part-time gamer who plans to hold
a stock for a handful of months or a couple of years at most.
On the downside, though, the middling range is also the most challenging portion of the
planning horizon. To explain the nature of the quandary, the simplest approach is to begin
with a couple of counterpoints.
For starters, we consider a stock index which has advanced at a blistering pace over the
past quarter. After the giddy move, the benchmark is a lot more likely to swoon rather than
15
surge even further over the next couple months. For this reason, it doesnt take a rocket
scientist to issue a downbeat forecast for the near future.
We can also cite a counterexample toward the long end of the time scale. For instance, a
market benchmark is far more likely to rise than to fall over the course of a couple of
decades no matter what where it happens to loiter today. In that case, a soothsayer can
safely predict a move to the upside without having to examine the entrails of birds or read
any tea leaves. The cheery outcome will almost surely come to pass regardless of the
vicissitudes of the market in the intervening years.
By contrast, foretelling the market over the middling range is the toughest task of all: there
are no pat answers that can be whipped out with abandon. On a positive note, though, the
intermediate stretch is the bailiwick of the fundamental approach as well as the technical
mode.
To recap, a forecast over the middling range is the most challenging of all. Unfortunately,
the middle ground is precisely where myriads of investors find themselves.
For the bulk of actors, then, the wholesome approach is to combine the fundamental and
technical modes of analysis. In that case, the next question is how best to merge the
divergent techniques.
To this end, we can identify two kinds of schemes: upward versus downward modes of
integration. The former approach begins with a microlevel analysis of the conditions in the
marketplace then moves upward in order to incorporate the high-level aspects. By
contrast, the latter tack begins with a broad scan of the big picture and drills down to the
nitty-gritty of a specific vehicle.
Either strategy involves a fusion of the fundamental and technical methods. As an
example, consider the bottom-up approach. The upward thrust could begin with the
outlook for earnings for a given company. This appraisal can then be combined with the
technical features of the price action the stock market in order to figure out the best point
of entry for acquiring a position.
16
By contrast, the top-down approach is spotlighted by the analysis of a specific stock
starting from the general tendency of the market as a whole to climb higher in recent
years. The broad picture can then be combined with other marcrolevel factors such as the
current policy of the central bank in expanding or contracting the pool of money sloshing
around the financial system.
The wide-angle view then sets the background for gauging the prospects for a given stock
in terms of the outlook for corporate profits. Another instance of a microlevel trait lies in the
latest reading of public sentiment regarding the candidate equity in particular, as in the
case of a falling price in spite of a rising stream of earnings for the firm.
In these ways, the top-down scheme can integrate sundry aspects of the fundamental as
well as technical schemes. The story is similar for the bottom-up approach to fusion.
In the sections to come, we will have occasion to employ the fundamental as well as
technical modes of analysis along with a combo of both. In the process, we will take up
both the upward and downward methods for blending the two types of techniques.
Showcase for Prediction
The task of forecasting this year poses a special challenge due to the rich mixture of
routine drivers as well as special factors. An example of a generic feature lies in the course
of economic growth or the impact of monetary policy. Meanwhile an instance of an
wayward facet involves the influence of a historical landmark or the import of a psychic
watershed.
As a point of departure, the stock market will respond to the usual array to forces in the
marketplace ranging from seasonal factors over the course of the year to hardy trends
lasting over lengthy spells. On the other hand, the bourse faces a bunch of unusual
outcrops as well. Due to the mixup of common aspects and distinct facets, the
benchmarks of the market are bound to exhibit generic features as as well as exceptional
aspects.
17
In particular, the yardsticks will display common behaviors along with divergent moves
amongst themselves over the course of the year. The story is similar in terms of their
turnout this year in comparison to their usual habits in years gone by.
In this messy environment, the lucid player can take a couple of approaches to forecasting
the stock market. One straightforward tack is to consider the outlook for corporate profits
over the year to come. This gob of insight can be used in tandem with the tendency of a
stock in the financial forum to move in tune with the earnings per share for the business
within the tangible economy. If the income level were to rise, for instance, then the price of
the stock is apt to move higher as well.
Unfortunately, the matchup of price and earnings comes with a number of snags. One
drawback lies in the crank-out of a single figure that marks the likely price at the end of a
sizable block of time such as a quarter or a year.
On the other hand, the players in the ring are more concerned about the highs and lows of
the price action on the bourse. The focus on peaks and troughs applies to the agile trader
riding the short-term waves in the market as well as the sedate investor timing the points
of entry and exit for a position held for a lengthy spell.
To bring up a counterexample in the case of the earnings technique, consider a forecast of
net income for a stock at $3 per share over the course of the year to come. That bodement
could cause the price of the equity to rise, fall or stand pat depending on the sentiments of
the investing public.
More generally, the ups and downs of the financial forum depend more on the whims of
the participants as they react with varying degrees of lucidity to the barrage of news
streaming out of the financial bazaar as well as the real economy. In other words, the
sequence of highs and lows depend mostly on the mood of the madding crowd as they
respond in their flighty fashion to the welter of fundamental forces such as business
conditions along with technical factors as in price patterns.
In order to thrash out a cogent forecast for the market, we need to make good use of the
entirety of crucial factors that play hefty roles in shaping the outcome. The resulting chain
18
of zigzags in price can then pave the way for tapping into the dynamics of the stock
market.
Top Exchange Traded Funds for the Stock Market
At the dawn of the millennium, the United States continues to play the starring role in the
world of finance. On one hand, the sway of the primo in the global economy has shrunk a
great deal since the heady days right after the close of the Second World War.
On a positive note, though, the main reason for the comedown happens to be a hearty
rather than dismal cause. The decline of the colossus in a relative sense on the global
stage stems not from the shrinkage of the U.S. economy but rather the upgrowth of the
other markets.
Despite its waning clout, however, the U.S. still serves as the standard bearer in the global
arena. When the stock market in America sags, for instance, the bourses in other countries
tend to droop even more.
Given the dominance of the colossus on the financial front, the mass media round the
world routinely report on the goings-on in the U.S. market. In this context, the best-known
benchmark of the stock market is none other than the American icon known as the Dow
Jones Industrial Average (DJIA).
The yardstick was created in the twilight of the 19th century in order to serve as a proxy for
the U.S. bourse as a whole. In its current form, the index is a simple average of the stock
prices for 30 heavyweights listed in the local market. The renowned names within the
pantheon run the rainbow from McDonalds and Wal-Mart to IBM and Boeing.
The DJIA is tracked by an index fund known as the SPDR Dow Jones Industrial Average.
The latter pool, launched in 1998, trades on the U.S. bourse under the ticker symbol of
DIA. The tracking fund is also known by the nickname of Diamonds.
19
In spite of its popularity, the Dow index suffers from a couple of drawbacks. One handicap
involves the fact that the yardstick covers only a small slice of a stock market that happens
to contain a myriad names.
To bring up a second weakness, the composite index is calculated as a simple average of
the stock prices. For this reason, a fractional change in the value of a high-priced equity
has a bigger impact on the benchmark as a whole compared to a relative shift of similar
size for a stock trading at a lower price.
As an example, a rise of one-tenth for an equity which trades at $200 at the outset
amounts to $20. By contrast, a similar move for a stock priced at $20 comes out to $2. In
that case, the pricey issue will have 10 time times the impact on the Dow index as its low-
priced counterpart.
In the larger scheme of things, however, the price level depends a great deal on the
number of shares outstanding which is merely a matter of administrative choice rather
than commercial significance. In other words, the price per share does not by itself reflect
the intrinsic worth of the company, nor its true heft in the real economy or the financial
forum. Even so, the Dow yardstick in effect acts as if the raw price does play a weighty
role.
In order to address these flaws, a novel benchmark was concocted in the summer of the
20th century. The index, drummed up by a service provider named Standard & Poors,
covers 500 of the leading companies listed on the bourse. The numeric value of the
yardstick is a weighted average of the stock prices. In the formula, the weights denote the
relative heft of the securities in terms of their total valuations on the bourse.
The benchmark covers many of the biggest names in the U.S. market. The members of
the circle run the gamut from Apple and Microsoft to Exxon and Pfizer.
In the financial community, a popular label for the Standard & Poors 500 index is found in
SPX. A notable exception applies to Yahoo Finance the most popular portal amongst the
investing public which likes to refer to the index as GSPC.
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The exchange traded fund for SPX index came to life in 1993 under the nickname of SPY.
The tracker is also known to its friends as the Spyders or Spiders.
In contrast, a couple of storied benchmarks deal only with the stocks listed on the Nasdaq
exchange. The latter market entered the mainstream of culture in the throes of a bubble in
Internet stocks during the late 1990s. Amid the gale of hype and hoopla, the price action
on the virtual nexus quickly turned into a staple of the evening news all across the planet.
When the mass media report on the status of the Nasdaq bourse, they usually refer to a
broad-based benchmark of the market. In this light, the Nasdaq Composite Index covers a
multitude of common stocks as well as uncommon widgets.
Among the latter are exchange traded funds and limited partnerships. Another kind of
vehicle lies in the American Depository Receipt (ADR), a security which represents a
dollop of equity in a company that happens to be based abroad. In tracking the motley
types of instruments, the Composite benchmark comprises more than 3,000 components.
In short, the Nasdaq Composite Index is a broad measure of the equities listed on the
virtual exchange. This yardstick is the usual benchmark reported by the financial media
throughout the planet.
On the other hand, a tracking fund would be hard-pressed to keep track of thousands of
stocks, many of which come and go in short order. The bulk of the equities on the Nasdaq
exchange belong to small companies that pop up and die out within a matter of years. For
this reason, tracking the Composite Index would entail a heavy load in the form of
administrative overhead as well as transaction costs, not to mention the endless run of
whops due to the complete wipeout of stocks all of a sudden.
A leaner alternative lies in a compact benchmark that covers roughly 100 of the leading
names on the Nasdaq exchange. In computing the yardstick, the average price depends
on a set of weights determined by the relative worth of the companies within the stock
market.
21
The Nasdaq 100 index includes outfits that are based outside the U.S. In this way, the
benchmark differs from the stance taken by the DJIA.
A second distinction lies in the fact that financial firms are excluded from the Nasdaq 100
yardstick. As a result, the texture of the benchmark differs from that of the DJIA as well as
the SPX.
In the financial community, a common abbreviation for the Nasdaq 100 index is found in
NDX. Meanwhile, the tracking fund for NDX came on stream in 1999 under the call sign of
QQQ. The latter vehicle is also known as the Qubes.
Over the short term, the trio of benchmarks for the stock market may move independently
of each other. For instance, the Dow index and its tracking fund might creep upward over
the course of an hour while the other two yardsticks and their offspring funds happen to
slide lower.
On the other hand, the three benchmarks tend to move in unison over longer spells lasting
a few days or more. The linkage of the yardsticks of course shows up in the parallel
movement of the tracking funds, whether to the upside or downside.
Despite the joint heading, though, the extent of the moves can differ by a goodly amount.
As a rule, the stocks of large companies tend to fluctuate less than those of their smaller
brethren. Since the Dow index covers 30 of the biggest names on the bourse, the tracking
fund is wont to be more demure than the others.
As we noted earlier, the SPX keeps track of 500 beefy stocks. Even so, the junior
members within the troupe are compact firms that lie closer to the class of middleweights
than the circle of titans. As a result, the Spyders tend to be a bit more flighty than the
Diamonds.
Meanwhile the Nasdaq 100 index covers the biggest companies listed on the namesake
exchange. On the other hand, some of the these concerns are not that huge.
22
From a different slant, the Nasdaq exchange contains a host of technology-based firms.
On the whole, the equities of the technical sort are prone to be more volatile than average.
For these reasons, the Qubes tend to undergo wilder swings than the Spyders which in
turn are more jumpy than the Diamonds.
These hallmarks of the tracking funds are visible in the relative performance of the
benchmarks in recent years. The chart below, courtesy of Yahoo Finance
(finance.yahoo.com), covers a stretch of half a decade ending at the onset of this year.
Chart 1. Performance of QQQ since its inception relative to DIA and SPY.
To serve as a baseline, the red curve portrays the path of DIA throughout the interval.
Meanwhile, the green arc depicts the course of the Spyders over the same stretch.
The behavior of the two vehicles is representative in terms of the overall performance
throughout the period as well as the action along the way. As an example, we can see
from the left side of the graphic that SPY fell more than DIA over the course of 2011, but
surged higher than its rival over the next few years.
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The behaviors are similar, except more so, for the blue curve that depicts the course of
QQQ. To bring up a stark example, the Qubes climbed nearly twice as much as the
Diamonds over the entire span of half a decade.
We will make use of this information later on as part of a supplmentary method for
forecasting any of the rival benchmarks in terms of one or more of the others. In particular,
we will project the likely outcomes for SPY and QQQ after sizing up the outlook for DIA
over the year to come.
Sway of Market Benchmarks and Index Funds
For the general public round the globe, the Dow Jones Industrial Average serves as the
icon of the stock market. The benchmark is widely reported in the financial sections of
general newspapers and evening broadcasts.
To a lesser extent, the story is similar for the Nasdaq market. As we noted earlier, the
usual yardstick reported by the press happens to be the Composite metric rather than the
Nasdaq 100 index. Even so, the ups and downs of the stock exchange are reported widely
in some form or other by the mass media not only in the USA but round the world.
By contrast, the S&P 500 benchmark is nowhere close to being a household name. The
yardstick lingers in the shadows, far removed from the consciousness of the society at
large.
That preceding lineup corresponds to the visibility of the chief benchmarks amongst the
general public. On the other hand, the impact of the index funds happens to vary inversely
with the fame of their namesake yardsticks. More precisely, the Spyders play the dominant
role, followed by the Qubes then the Diamonds. The order of prominence shows up in
terms of the total value of the assets under management as well as the daily volume of
trading.
From this standpoint, then, DIA is of lesser import than its main rivals. If a single index fund
had to be crowned as the top dog, then SPY would win the title hands down.
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From a different angle, the dominance of the Spyders is consistent with the central role
played by the underlying index within the financial community. For the bulk of professionals
ranging from fund managers to academic researchers the most popular benchmark is
found in the S&P index.
From the standpoint of the genuine investor, however, the choice of one vehicle over
another does not make a great deal of difference in one sense. The main reason lies in the
allied motion of the underlying benchmarks along with their tracking funds.
As an example, the Diamonds tend to move in unison with the Spyders. For instance, DIA
is prone to travel in the same direction, and by a comparable amount, when SPY rises or
falls by a single percent. In that case, a forecast for SPY is for the most part a redundant
exercise in a survey that happens to feature DIA as well.
Due to the tie-up of the index funds, an efficient course of action is to sketch out the path
of the Diamonds then use the mapping as a starting point for the Spyders as well as the
Qubes. The outcome for the latter two vehicles is apt to mirror to a high degree the relative
changes in price for DIA.
To recap, the lot of the Diamonds is linked closely to the fortunes of the Spyders. That is,
DIA tends to travel in the same direction, and by a comparable amount, when either vessel
makes a sizable move. In that case, a forecast of the Spyders is for the most part a
superfluous exercise within a survey that happens to feature the Diamonds as well.
For these reasons, we will focus chiefly on DIA in this report. The turnout for the Spyders
will mirror to a high degree the relative motion of the Diamonds. The same applies to the
Qubes, although the extent of the moves tends to be greater.
On a cheery note, the Diamonds are composed of 30 of the biggest and most stable
names on the bourse. By contrast, the Spyders comprise 500 of the largest stocks, some
of which are worth only a few billion dollars on the stock market and are thus closer to
middleweights than heavyweights.
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The diversity of sizes applies as well to the firms within the Nasdaq 100 Index along with
their disparate valuations. Moreover the bulk of the Nasdaq benchmark is made up of
techonology firms whose stocks tend to be highly volatile.
Given this backdrop, the Spyders and Qubes bounce around more than the Diamonds in
response to the passing whims of the madding crowd. As a result, DIA is a bit easier or
more precisely, less difficult to predict than its major rivals. For this reason, we will use
the venerable benchmark as the main vehicle for forecasting the stock market.
In short, the overall behavior as well as the punch line do not vary a great deal amongst
the chief benchmarks. As a result, a portrait of one is in general tantamount to a sketch of
the other from the standpoint of the genuine investor.
Hits and Misses over the Past Year
A year ago, we presented a bunch of forecasts dealing with the top benchmarks of the
stock market over the course of a year and more. On one hand, the accuracy of the
longish predictions remain to be seen.
On the other hand, we can review the turnout for the year-long predictions. Taken as a
whole, the calls turned out to be fairly right yet somewhat lacking.
The mainstay for forecasting was the tracking fund for the Dow Jones Industrial Average.
The primal index behaved pretty much as we had envisioned.
Meanwhile the secondary benchmarks took the form of SPY and QQQ. The prospects for
the broad-based yardsticks were obtained largely by using the primary forecast as a
starting point.
As a backdrop, the trio of beacons tend to move in parallel, whether to the upside or
downside over all times scales ranging from less than a day to more than a year. In that
case, the peaks and troughs in price are prone to occur around the same time as well.
26
Looking at the big picture, the overall return on SPY over the course of the year differed
from the presaged value by a handful of percent. By contrast, the Qubes for the most part
stuck to the defaut path charted in advance and ended up within a few percent of the
envisaged target.
Amongst the professionals in the financial ring ranging from the practitioner in the pits to
the researcher on the sidelines the most popular benchmark of the stock market lies in
the S&P index of heavyweights. This yardstick covers 500 of the largest companies on the
U.S. bourse. Despite the listing on an American exchange, however, many of the firms
obtain a hefty chunk of their profits from far-flung operations round the globe.
As we expected a year ago, the U.S. economy turned in a subdued but tolerable
performance in the midst of a modest advance by the global economy as a whole. Thanks
to the benign environment, the earnings of the firms covered by the S&P benchmark
expanded as well.
In line with our expectations, the income level did continue to climb higher. From a larger
stance, the profits of the companies within the index have risen at a measured pace
following a hairy plunge in 2009 in the throes of the Great Recession.
As a point of reference, consider the net income for the stocks within the S&P index on a
12-month basis. At the beginning of 2009, the average earnings came out to an annual
sum of $13.31 per share, after adjusting for inflation and fixing the amount in terms of
constant dollars at the price level for November 2012.
A year onward, the corresponding figure soared to $57.68 per share. By the beginning of
2011, the intake swelled to $82.24 per unit and continued to grow throughout the year.
Meanwhile the pertinent figure for January 2012 was $88.85.
In fact, the earnings had hit rock bottom at $7.42 per share back in March 2009. After that
flop, the profits climbed steadily over the years to follow. A notable exception along the way
was a small hiccup in March 2012 when the intake slipped by 14 cents compared to the
prior month (Multpl.com, 2013).
27
Based on an annual sampling of the data, however, the only blot in the picture was a small
dip in January 2013 when the earnings slipped a bit to $86.89. By September the same
year, however, the profit stream regained its vigor and climbed to $92.79 (Multpl.com,
2014).
As things turned out, March 2009 was also the point at which the stock market had hit its
nadir. The S&P 500 index plumbed a low of 666.79 points while its tracking fund fell to
$67.10.
Based on the last few paragraphs, we can see that the stock market turned around
precisely when the profit level started to recover. In other words, the investing public was
simply keeping up with the ongoing flow of earnings for the companies covered by the
S&P benchmark. So much for the fanciful notion that the stock market always moves in
advance of the real economy.
To recap, the profits of the companies within the S&P index have been rising steadily since
the financial crisis of 2008 along with the worldwide recession. The earnings per share on
a yearly basis hit a low of $13.31 in January 2009 but climbed higher to reach $89.66 by
June 2012, with further gains to come.
In this way, the stock market has been slogging higher despite the occasional flare-up of
jitters in the financial community. A showcase of the latter was the crash of the stock
market in autumn 2011. Looking in the forward direction, we can expect an upturn in
performance from a raft of bourses round the world which have wallowed in a funk over
the past several years.
A big reason for the stunted progress of the emerging markets lay in the worries of the
investing public over a slowdown in China in tandem with knock-on effects throughout Asia
and the rest of the world. As usual, though, the severe angst of the madding crowd has
turned out to be largely groundless.
As we noted earlier, the politicians of the West have opted to strangle their economies by
propping up the hulking distortions in the real economy caused by the rage of speculation
28
in real estate during the run-up to the financial crisis of 2008. Under normal conditions,
however, the housing sector acts a primary engine of growth for the entire economy.
The same is of course true in the inverse direction. If the property market is bound up in
chains, then the rest of the economy can at best merely limp along.
In the absence of a wholesale change in policy, the bulk of Western markets will continue
to gnash and grind well into the next decade (Kim, 2011, 2012). In that case, the real
economy as well as the stock market will be hard-pressed to make much headway.
On the other hand, there is no good reason for the sprouting regions of the world to
behave in a similar fashion. For one thing, the emerging markets can and should trade
with each other in greater volumes and thus ensure their mutual growth.
As a happy consequence, the upsurge of the spry regions will lead to the uptake of imports
from Western countries in greater volumes. The products in demand span the gamut from
luxury cars and designer jeans to blockbuster films and cross-border tourism. As a result,
the groundswell of growth will help to bolster the blighted nations of the West despite their
litany of self-inflicted wounds and counterproductive schemes.
A year ago, our main task was to thrash out a medley of forecasts for the trio of index
funds that track the leading benchmarks of the stock market. In the process, we began
with a projection for the Diamonds, then moved on to the Spyders followed by the Qubes.
There were several reasons for starting out with DIA rather than its rivals. For one thing,
the Diamonds keep tabs on the Dow Jones Industrial Average, which boasts the longest
track record by far.
A second, and related, reason involved the fact that the Dow index happens to be the
leading icon of the stock market for myriads of investors as well as observers. The beacon
holds sway not only in the U.S. but throughout the world.
To bring up a third feature, the Dow tends to be more stable than either of its main rivals.
The reason is that the benchmark covers 30 of the biggest names in the marketplace.
29
By contrast, the Nasdaq yardstick spans a broader array of the top 100 firms within its
compass. Meanwhile the S&P index keeps track of a larger troupe of 500 stalwarts. As a
result, each of the expansive benchmarks contains a welter of firms that are closer to the
status of middleweights rather than heavyweights. In line with the norm in the stock
market, the smaller contenders tend to be more flighty than their larger brethren.
Although exceptions can arise, the Dow index tends to be more demure than its younger
siblings. An extreme example arose in the throes of the Internet bubble of the late 1990s,
when the Dow did not come close to joining the manic upspurt of the stock market as a
whole.
Meanwhile, an example closer to the usual state of affairs cropped up during the ramp-up
of the bourse in the second half of 2013. A mini-bubble in the U.S. was mirrored by the
antics of SPY and QQQ, which raced higher with scarcely a pause.
In line with the norm, however, the Diamonds eased up and took a few months to catch its
breath. More precisely, the resting point turned out to be a milepost in the $157 zone.
On the other hand, the Spyders and Qubes kept dashing higher. As a result, the crispness
of the milestone for the Diamonds which showed up as a horizontal line on the price
chart for DIA turned into a smeared zone in the case of SPY as well as QQQ.
The resulting image looked as if the last portion of the chart for each of the Spyders and
Qubes had been stretched upward so that the horizontal stripe had morphed into a mushy
ramp sloping upward. In other words, there was no landmark to speak of merely a
muddled blotch.
For a variety of reasons, then, the Diamonds have their attractions as the mainstay for
charting the course of the bourse going forward. A forecast for DIA can then serve as a
springboard for plotting the future of SPY as well as QQQ.
30
Performance of DIA
When the previous set of forecasts was published a year ago, we noted that the U.S.
bourse had swollen too much too fast over the preceding few months (Kim, 2014). Due to
the froth in the marketplace, the bourse was poised to suffer a hefty breakdown over the
weeks to come. When the prediction was made, the prevailing price of the Diamonds was
sliver below the prior peak of $165.29, which also turned out to be the high point for
January.
A couple of weeks later, the DIA fund touched a low of $153.12 (Yahoo, 2015a). The
smackdown turned out to be a plunge of 7.4% from high to low. Put another way, the
blowout amounted to nearly half the downcast of 15% that marks the lower limit of a full-
blown crash of the stock market.
In the same briefing, we noted that the Diamonds were slated to rise but not get very far
during the first half of the year. That much turned out to be true. The peak during this
period was formed in June at the $169.58 level. The latter value lay only a couple of
percent beyond the closing price of $165.47 at the end of the previous year.
We also foresaw a major roadblock at the $178.22 level. Moreover, this milestone was
likely be reached by the beginning of the summer. The barrier itself was pretty much on
target, although the Diamonds did not reach the general vicinity until the autumn. The
tracking fund managed to reach $173.32 in September, which lay within a couple of
percent of the blockade.
After a plunge over the month to follow, DIA surged to a high of $178.69 in November
folowed by a peak of $180.71 in December. Finally, the tracker closed out the year at
$177.88. Each of the latter three values lay within 1.4 percent of the major landmark that
we had foreseen at $178.22.
We opined a year ago that the outlook for the second half of 2014 was not much better
than the first half. That much was also true.
31
Moreover, the bourse was apt to suffer a breakdown of middling size. The slump would
likely amount to a halfway trip to the threshold of 15% that marks the low end of a full-
blown crash in the U.S. In that case, the upset should result in a knockdown in the ballpark
of 7 or 8 percent.
In gauging the extent of the breakdowns, we can turn to Chart 2. The graphic, courtesy of
Stockcharts (stockcharts.com), displays the price action for DIA over the course of 2014.
For each stick figure in the diagram, the vertical stroke depicts the range of values from
low to high during a single day of trading, while the horizontal tick denotes the price level
at the close of the day.
Chart 2. Path of DIA during 2014.
For starters, we can see that the Diamonds reached a high of $162.01 around the end of
2013. Then the tracking fund crumpled over the weeks to follow and touched a low of
$150.01 in February. The smashup amounted to a plunge of 7.2%.
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After bouncing around for half a year, DIA touched a high of $169.48 in July before
tumbling to $161.55 a couple of weeks later. In this way, the market fell below its initial
level from the beginning of January.
The market then recovered over the next month, touching a high of $172.35 in the middle
of September according to the chart. The next act was to suffer a crushing fall, ending at
$157.39 a month later. Once again, the latter price lay below the initial price at the
beginning of the year. Moreover the smashup amounted to a cutdown of 8.7%
In these ways, the takedowns of the Diamonds popped up in line with our expectations at
the beginning of the year. In particular, DIA suffered a couple of breakdowns in excess of a
halfway trip toward a full-blown crash of the market.
For the sake of good form, we should also take a look at a pair of big flops last year
suffered by the S&P index that is the yardstick of choice for the professionals. At the
outset, the flagship benchmark peaked at 1,850.84 points in January before tumbling to
1,737.92 units a few weeks later. The takedown amounted to a drop of 6.5%.
In the autumn, the same index touched a high of 2,019.26 before plunging to 1,820.66 a
month later. The wipeout amounted to a smashup of 9.8%; that is, roughly two-thirds of the
way toward a full-bodied crash of the stock market.
We now return to the main subject of this section: the performance of the Diamonds. The
blue ovals in the foregoing chart spotlight the surge in trading volumes that accompanied
the blowups of the winter and the autumn.
On a positive note, the spates of panic were helpful in squeezing out some of the froth in
the market, and thus paving the way for further progress down the line. As an example, the
tracking fund recovered smartly from the mini-crash in October before taking another dive
of modest size in December.
According to Chart 2, DIA reached a zenith of $180.71 before closing out the year at
$177.88. The latter value was 7.5% higher than the baseline of $165.47 marked out at the
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end of 2013.
By way of comparison, the initial milestone of $178.22 that we foresaw at the beginning of
last year lay 7.7% beyond the closing value of DIA in 2013. In other words, the actual
return fell short of the envisaged landmark by just 0.2 percent.
In our forecast last year, we averred that the summer and autumn would be a good time
for the cautious investor to stay clear of the stock market. After that stage, the bourse
would regain its footing and tramp upward once more during the last quarter of the year.
Thankfully, there were no big surprises along these lines.
To bring up an abortive streak, however, we also mentioned that the trend line over the
previous couple of years could perhaps persist in 2014. In that case, the ramp-up over the
year would be a hike of 21.6% which corresponds to a milepost at $190.91. The latter
marker for 2014 would represent a gain of some 15.4% over the price of $165.47 recorded
at the end of 2013.
On the other hand, the secondary scenario did not come to pass. If it had, we would have
to worry right now about the heaving froth in the stock market, along with the frightful
consequences for a thumping bust as this year unfolds.
For the most part, the winds of fortune have been blowing as they should. Granted, the
market has been a tad on the puffy side. Where the Diamonds are concerned, for
instance, the market advanced by 7.5% in 2014 on top of a hefty surge over the previous
year.
To sum up, the stock market is a bit foamy at this juncture. On the other hand, the bourse
is not so frothy as to pose a severe threat to further progress in 2015.
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Outcome for SPY and QQQ
In addition to the Diamonds, the chief benchmarks of the stock market consist of the
Spyders and Qubes. We noted last year that SPY is prone to head in the same direction
as DIA but advance somewhat more in relative terms.
The story has been similar for the Nasdaq market. The main difference lies in the tendency
of QQQ to display even larger swings in price than SPY, let alone DIA.
A year ago, we predicted that both the Diamonds and Spyders would turn in a restrained
performance over the course of 2014. For one thing, the two pacers had already passed
their all-time peaks and were now plowing into unknown terrain. In line with the augury, the
advance of the stalwarts was less torrid last year compared to their upsurge over the
course of 2013.
Even so, the Nasdaq market had ample room to advance before it regained its historic
peak formed at the height of the Internet rage. As a result, we foresaw a brighter future for
QQQ compared to SPY. And in fact the Nasdaq tracker did outrun both the Spyders and
Diamonds by a solid margin.
As for the numeric target, we noted that the final milestone for SPY in 2014 should lie
around 17 percent higher than its closing value at the end of the previous year.
Unfortunately, the beefy figure turned out to be rather optimistic.
The chart below has been adapted from Yahoo Finance (finance.yahoo.com). From the
purple curve, along with the shaded number on the right side of the image, we can see
that SPY rose by 11.29% over the span of a year ending in 2014. Based on the latter pair
of returns, the actual performance fell short of the anticipated value by nearly 6%.
On the upside, though, the forecast for the Qubes met a better fate. A year ago, we
predicted that QQQ would rise by 19.8% over the course of 2014.
35
We can see from the turquoise curve that the Nasdaq fund managed to surge by 17.38%.
The actual performance fell only a couple of percent short of the augured target marked
out at the beginning of the year.
At this juncture, we take a step back in order to scan the big picture. As a point of
departure, we note that the Qubes reached a price of $87.96 at the end of 2013.
Chart 3. Performance of DIA last yearcompared to SPY and QQQ.
At that point, the closing price was a far cry from the zenith of $232.88 touched in March
2000. To be fair, the latter figure has to be halved due to a 2-for-1 stock split that occurred
in the second half of March 2000. For this reason, the pertinent price a year ago came out
to $116.44.
The latter figure lay within easy reach of the last milestone of $105.38 that was projected
for 2014. Spurred by the experience of the past, the mass of investors would do their
darnedest to shove the Qubes up to their all-time high. And if the central bank were to print
up enough money to accommodate the push, the madding crowd could well succeed.
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As things turned out, QQQ did dash ahead at a giddy rate. Even so, the final outcome was
fell short of the historic landmark. Even so, the Qubes closed out the year within a short
distance of the airy peak formed at the height of the Internet bubble.
Turnout for Dynamic Markets
When the stock market in the U.S. is on a roll, the other bourses of the world tend to
follow. In that case, the rest of the planet should on average have turned in a peppy
performance over the course of 2014.
Sadly, though, the usual result did not come to pass. Instead, the bulk of markets round
the world turned in a lousy showing throughout the year.
In the realm of budding markets, a pioneer is found in a tracking vehicle known as the
iShares MSCI Emerging Markets fund; the touchstone trades in the U.S. under the ticker
symbol of EEM. Meanwhile, a second beacon lies in the Vanguard FTSE Emerging
Markets ETF which runs under the banner of VWO.
The chart below, adapted from Yahoo Finance, covers the period from the debut of VWO
in spring 2005 until the end of 2014. The graphic displays the relative performance of the
trackers for the emerging markets in the form of VWO and EEM, in addition to other
beacons as in the case of DIA and SPY.
Another feature on the chart concerns a tracking fund for smallcap stocks. In this arena,
the leading yardstick is an index of 2000 bantam names compiled by a service provider
named Russell Investments. The benchmark is tracked by a communal pool which trades
on the U.S. bourse under the call sign of IWM.
As we can see from the left side of the exhibit, the emerging funds rose more than twice as
much as SPY and DIA until the end of 2007. Then the saplings fell roughly twice as hard
during the stormy spells before and after the financial crisis of 2008.
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After that stage, the dynamos again rose around twice as much as the American
benchmarks over the next couple of years. Then the budders crumpled once more in their
usual fashion around the time the U.S. bourse crashed in the autumn of 2011.
Chart 4. Performance of VWO since its launch relative to EEM, DIA, SPY, QQQ and IWM.
On a positive note, small stocks have fared better than the emerging markets in recent
years. On the downside, though, we can see from the yellow curve in the chart above that
the Russell fund suffered a crushing blow before, during and after the financial crisis of
2008. Even so, the midgets tracked by IWM did not fare much worse than the giants in the
form of DIA and SPY.
The small fry took another big plunge when the stock market as a whole crashed in 2011.
Since then the minnows have fared better than most of their counterparts appearing on the
chart.
On a cheery note, the Nasdaq market has fared even better. As a point of reference, the
breakdown of QQQ during the Great Recession was comparable to those for DIA and
SPY. The Qubes suffered modest takedowns in 2010 and 2011, but surged ahead
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afterward. As a result, the technology-laden benchmark has in recent years turned in a
rousing performance compared to its rivals appearing on the chart above.
From a larger stance, the U.S. serves as a bellwether within the real economy as well as
the financial forum. In particular, the industrial nations of the world have a custom of
following the pacesetter. On the other hand, the standard pattern has for the most part
failed to take hold over the past few years.
The aberrant state of affais is reflected in the sappy performance of mature economies
such as Canada, Britain and Germany. The standard bearers for these markets are found
in a trio of index funds known as iShares MSCI Canada (EWC), iShares MSCI Germany
(EWG), and iShares MSCI United Kingdom (EWU).
The chart below spans the same time frame as the foregoing graphic. The main difference
is that EEM, DIA, QQQ and IWM have been replaced by EWC, EWG and EWU.
Chart 5. Performance of VWO since its launch relative to SPY, EWC, EWG and EWU.
The blue line shows the relative peformance of the VWO fund. The communal pool
bounced around a great deal but has gone nowhere over the past four years.
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Based on historical data from Yahoo Finance, the tracking vehicle was valued at $41.00
per share at the end of 2009. Five years onward, the deadbeat slid to a price of $40.02 at
the close of 2014.
Meanwhile, we can see from the red curve that the Canadian vehicle has for the most part
followed the course of VWO in recent years. For instance, EWC has flailed around without
making much headway over the past couple of years.
A key reason for the crummy performance lies in the concerns of the investing public over
the pulse of global growth. As it happens, Canada is a major exporter of raw materials as
well as a financial center for the mining industry round the world. For these reasons, the
fate of the local bourse depends a great deal on the pose of the general public regarding
the outlook for economic growth in the budding regions along with the demand for natural
resources.
In casting a glance at Europe, we see that the British market bounced around but made
scant progress over the past couple of years. One reason for the dismal showing lies in
the fact that the bourse in London hosts a raft of companies focused on the production and
distribution of natural resources. Moreover a hefty portion of the market consists of the
financial sector that has yet to recover from the excesses of the housing bubble, despite
the gobs of bailouts and other favors bestowed by the politicians. A third factor is the plight
of the economy in Europe, which continues to wobble on the verge of slipping back into
recession. Given this backdrop, the stunted performance of EWU reflects the jitters of the
international crowd over the global economy in general and the European theater more
keenly.
On the bright side, though, the London bourse also contains scads of firms in diverse
sectors ranging from retailing to infotech. As a result, Britain could and should fare better
than many of its counterparts on the Continent over the next couple of years.
Another aspect of the chart is the trace for Germany. From the arc shown in light purple,
we can see that EWG formed a crest in 2011, then thrashed around and ended up pretty
much at its prior peak at the end of 2014.
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On a positive note, Germany is a powerhouse of global trade that exports mounds of
products to neighboring countries as well as emerging regions. The goodies shipped
abroad span the rainbow from luxury cars and capital equipment to medical tools and
transaction software. For this reason, EWG is destined to gain traction and forge ahead as
the global economy regains some of its usual verve over the next year and beyond.
In the modern era, the bulk of growth in the gross world product springs from the emerging
countries. In that case, the stock markets in the lusty regions ought to flourish in like
fashion.
Yet the swarm of international investors has been wary of stepping with gusto into the
vibrant markets. Over the past couple of years, in particular, the fear of volatility in the
emerging regions has kept the huddled masses at bay.
The glut of angst will of course fade away sooner or later. When that happens, the budding
markets should surge by leaps and bounds as they make up for lost time.
To sum up, a host of stock markets round the world have trailed far behind the U.S. bourse
over the past couple of years. Even so, the laggards are slated to pick up the pace before
long.
An example lies in the lurching markets of Europe which are likely to fare better over the
year to come. In a similar way, the emerging regions are sure to come to life and spread
their wings, thus outshining the benchmarks of the U.S. in due course.
Facing Forward
For the world as a whole, the outlook for growth over the next couple years is roughly in
line with the usual slant since the financial crisis of 2008 in tandem with the Great
Recession. As a backdrop, the global economy expanded by a mere 2.6 percent in 2014,
up slightly from 2.5% during 2013.
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On the bright side, the World Bank expects the gross world product to expand by 3.0% this
year after adjusting for the official rates of inflation followed by 3.3% in 2016 (World,
2015). Meanwhile the Conference Board foresees a slightly higher pace of growth
amounting to 3.4% this year (Conference, 2014).
In recent years, the total volume of economic activity in the emerging regions has been
comparable to the output churned out by the mature countries. Given the higher rate of
growth in the sprouting markets, the lusty countries will generate the bulk of the increase in
global income.
More precisely, the developing regions are slated to surge by 4.8% in 2015, followed by
5.3% a year later. By contrast, the rich countries will creep ahead by a mere 2.2% this year
before crawling up to 2.4% in 2016 (World, 2015).
From a different angle, the earnings of the companies listed in the stock market form a
solid bridge between the real and financial markets. To begin with, the intake of profits in
the corporate sector depends largely on the vigor of the tangible economy. In addition, the
flow of earnings plays a pivotal role in a popular gauge watched by the investing public;
namely, the ratio of the stock price to the earnings per share.
In this way, the income stream has a hefty impact on the fortunes of the stock market. For
this and other reasons, the lot of the companies in the real economy has a decisive impact
in the fortunes of their equities on the bourse.
On the upside, the real economy is slated to fare better in 2014 than it did last year.
Although the gains will be moderate, the mass of investors can look forward to a dose of
healthy gains even so.
By contrast, the stock markets in far-flung countries are likely to show mottled results. On
the downside, the buoyant bourses in the U.S. and some other countries are bound to
grind higher at a labored pace while they take some time to digest the beefy gains racked
up last year.
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Even so, the buildup of the real economy in the emerging regions will nudge up the local
bourses as time goes by. Sooner or later, the swarm of international investors will shake off
the jitters and return to the sprouting markets as the hotbeds of economic growth. In that
case, the lagging markets of Asia and other regions should begin to feel the positive vibes
by the end of this year.
Impact of Money Printing
A prominent source of economic data in the U.S. is found in the St. Louis Fed, a branch of
the central bank. According to the latest figures conveyed by this organ, the Consumer
Price Index (CPI) rose at an annual rate of 0.7% over the course of 12 months ending in
December 2014 (Federal, 2015a).
The same outfit declares that the gross domestic product (GDP) slumped by a couple of
percent during the first quarter of 2014, then surged by 5.0% on an annual basis over the
course of a year ending in the third quarter. The latter value was suppsedly the real rate
of growth after adjusting for the bane of inflation based on official figures published by the
government itself.
On the other hand, the World Bank begs to differ. According to the international agency,
the latest tally was a growth rate of 2.4% for the U.S. over the course of 2014 (World,
2015). The latter estimate is reckoned in terms of the purchasing power of the greenback
in 2010; in other words, after taking inflation into account. The slim figure is a lot more
credible than the fat number of 5% touted by the Federal Reserve.
On the financial front, a standard measure of the money supply deals with the stockpile of
cash along with near-cash assets. In this context, a yardstick known by the clunky term of
Money Zero Maturity (MZM) refers to the volume of liquid assets which can be turned at
once into hard cash.
In other words, the maturity date for such an asset is zilch. The fluidity of a liquid asset
stands in stark contrast to the inertness of many other items such as time deposits or real
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estate. Simply put, MZM denotes the pool of money which is readily available for spending
and consumption in the real economy as well as the financial forum.
By contrast, a broader definition of money focuses on the role of the currency as a medium
of exchange. As an example, a customer could pay for a bag of groceries by handing over
some cash or writing a check.
In this light, M1 denotes the stockpile of physical money in the form of coins and bills in
addition to virtual funds contained within demand deposits. An example of the latter is a
checking account. Another sample is a Negotiable Order of Withdrawal (NOW) account at
a commercial bank; this type of setup offers a modicum of interest payments on the cash
balance, yet permits the customer to write drafts against the amount held on deposit.
The purpose of the M1 yardstick is to track the amount of money that is more or less in
active circulation. For this reason, the metric does not include conventional forms of
savings accounts.
A broader definition of money is found in M2, which covers the components within M1 as
well as other forms of near-cash. The liquid assets in the latter category include the
balances in savings accounts as well as money market funds plus time deposits of
moderate size. On one hand, a constrained asset of this sort is less handy as a medium of
exchange. Even so, each form of wealth can be converted into cold cash in short order.
Suppose that an individual moves a wad of $1,000 from a checking account into a money
market fund. From the standpoint of the saver, the amount of cash available for spending
has hardly changed since the transaction can be reversed at will. In fact, the owner could
well treat the cash in the money market fund as a demand deposit if the account comes
with a packet of checks. As a result, the transfer of cash from one type of account to
another has resulted in no material change in the eyes of the saver.
On the other hand, the transfer of funds out of the checking out reduces the trove of
money according to the M1 measure. By contrast, the overall amount reckoned by M2
remains unchanged. In view of this distinction, the latter yardstick represents a better
measure of the amount of money available for spending by consumers from a practical
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stance. Given this backdrop, M2 is arguably the most popular measure of money used by
the economist.
In recent decades, however, the constrained metric of MZM has come to play a growing
role in gauging the scope of the money supply. For these reasons, we will take up this duo
of yardsticks in sizing up the volume of money sloshing around the marketplace.
The precise rate of money creation of course varies over time. Even so, an example or two
will highlight the dizzy pace at which the stockpile has been diluted and the currency thus
weakened.
As a starting point, consider the pool of MZM in the aggregate. Around the end of 1999,
the narrow measure of money stood at $4.341 trillion dollars after adjusting for seasonal
variations. By the time of the latest tally in December 2014, however, the stockpile had
ballooned to $12.919 trillion (Federal, 2015b).
In simple terms, the money supply nearly tripled over the course of 15 years. The buildup
came out to a compound rate of annual growth of just over 7.5%.
Meanwhile the story did not differ much from the standpoint of the M2 yardstick. At the end
of 1999, the broader gauge amounted to $4.617 trillion dollars after seasonal adjustments.
By December 2014, the corresponding figure had soared to $11.632 trillion (Federal,
2015c). In that case, the compound rate of growth came out to nearly 6.4% a year.
In recent years, we have been told that the real economy has been growing by a couple of
percent a year at most after adjusting for inflation according to official estimates of the
increase in the cost of living. In that case, what happens to the tall tale when we learn that
the supply of money has surged by some 7% a year according to the MZM yardstick, and
slightly less in terms of the M2 metric?
The dollar is breaking down chop-chop, thats what. The only consolation of sorts for
Americans is that the currencies in Europe have been crumbling even faster than the
greenback.
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The euro and other European currencies form the bulk of a currency benchmark known as
the U.S. Dollar Index. Given the swift collapse of its European rivals, the Dollar Index has
been soaring since the summer of 2014.
On one hand, a good fraction of the upsurge in the money supply gets stashed away in
bank vaults. After the near-death experience of the financial flap of 2008, the folks in the
banking industry have balked at doing their jobs. That is, the banksters are now loath to
lend money not only to berserk speculators but to sane and healthy companies as well.
On the other hand, neither MZM nor M2 includes the cash tucked away in the depths of a
bank vault. In other words, each of the yardsticks keep track of the heap of dough that
people can put to ready use in order to buy goods and services.
In that case, one portion of the upsurge in the money supply will naturally trickle into the
housing sector. Not surprisingly, the property market has been creeping upward in recent
years without any good cause.
From a different standpoint, the median level of income in the U.S. has stagnated or even
declined over the past decade. Meanwhile, the cost of living has surged far beyond the
piffling figures trotted out by the governments of the West. Given the cutdown of wealth by
way of lower income as well as higher outgo for the general public, the average dwelling is
still grossly overpriced thanks to the misguided schemes of the politicians in propping up
the property market.
Due to the plethora of contrived schemes, the housing sector will not recover its health in
full nor regain its stride until the 2020s. As a result, the economy as a whole will also have
to limp along for another decade or so (Kim, 2012).
Now what happens to the rest of the money pumped out by the central bank? The obvious
destination lies in the financial forum especially in the form of stocks and bonds. As a
direct outgrowth, the leading benchmarks of the bourse have been dashing higher in
recent years.
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The inrush of money pumped into the financial system by the central bank has to go
somewhere. As a consequence, the mass of investors have been eager to jump on any
excuse, whether real or imagined, to pile into the stock market.
Roundup of Trends in the World Economy
Over the next couple of years, the global economy is slated to chug along as it has done in
the recent past. On the upside, though, the outlook at this stage is a tad better than it has
been of late.
According to a preliminary estimate by the World Bank, the global economy grew by 2