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3 Reasons Stocks Could Plunge in 2015

It seems like the stock market crash and financial crisis of 2008-09 were a million years ago, doesn’t it?

I remember watching CNBC and BNN, endlessly entertained at the carnage, even as my portfolio dwindled in value. In hindsight, I should have turned off the TV, called up everyone I knew, and begged to borrow money to buy stocks. Instead I thought the bear market would last years (like in 2002-04), and I had plenty of time to weed through the bargains. I bought some, but I wasn’t nearly aggressive enough.

In stock market terms, it has been a long time since the Great Recession. By the time the calendar flips over to 2015, it’s expected that stocks will have posted gains for six consecutive years, only really stumbling twice — once in 2011 on debt ceiling worries and again in October. Compared to historical rallies, our current bull market has only been surpassed by the one in the late 1990s. And we all know how that turned out.

Here are three reasons why 2015 could end up being a bad year for stocks, and how you can position your portfolio to minimize the damage.

Warning clouds are already here

It’s easy to look around the world and become bearish. With the exception of North America, it looks pretty bleak.

Japan recently released third-quarter GDP numbers that were terrible. Economic growth declined 1.6% after falling 7.3% the quarter before. Weakness was blamed on the nation’s new sales tax, even though its central bank has begun its own version of quantitative easing to stimulate the economy.

Meanwhile, in China, housing prices are falling, imports of metals, coal, and other materials are down, and growth isn’t nearly as robust as it was a few years ago. Bearish analysts are even going as far as accusing the Chinese government of artificially increasing its economic numbers.

And in Europe, it seems like Germany is the only economy that isn’t weak. Investors have bid up the price of bonds so much that nations such as Spain, Ireland, and Portugal can now issue 10-year government debt at 2% coupon.

Add all these factors together and it’s easy to paint a bearish picture for the world economy. North America will not be immune to these issues.

The Buffett indicator

Billionaire investor Warren Buffett has a favorite metric he uses to value the overall stock market. Buffett takes the market cap of every U.S. stock and divides it by the GDP of the U.S. economy. If the percentage is under 100%, he’s bullish on the stock market.

Currently, the ratio stands at 131%.

To put this into context, there’s only been one other point in history where this ratio has been this high, and that’s during the dot-com bubble of the late 1990s. Is it any wonder why Buffett is sitting on so much cash?

Pay attention to commodities

Gold and oil get all the attention, but it’s a bloodbath out there for most commodities.

Material prices have declined almost across the whole sector. Strong prices in 2010 and 2011 for many raw materials led to renewed exploration and development. Now, with the slowdown in China, there’s too much supply on the market. If economic growth was expected to still be brisk, commodity prices would be higher.

How you can position your portfolio

If you’re investing for the long haul, a big decline in stock prices should be pretty exciting. What a great time to buy.

But what to do in the meantime?

Take a look at stocks that are less risky. Loblaw Companies Limited (TSX: L) is Canada’s largest grocer, which is a sector that’s traditionally done well during market weakness. It’s positioned well going forward thanks to its acquisition of Shoppers Drug Mart, and looks to be trading at a pretty reasonable valuation.

Another stock to hold during a bearish market is Fortis Inc. (TSX: FTS), Canada’s largest power generator. Not only is power a remarkably stable business, but Fortis has been able to raise its quarterly dividend 42 years in a row. That’s some nice consistency.

Or take a look at our top pick for 2015. Check out the report below.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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