Investing contest’s winner is bullish about 2015

The Dow Jones industrial average has been up for the last six years in a row.

Can 2015 be lucky No. 7?

Local stock experts are guarded about whether the fourth-longest rally since World War II can keep going. After all, the Federal Reserve is expected to increase interest rates this year, while economic and political woes abroad show no signs of abating.

But Dwight Melton, for one, thinks the U.S. stock market is up for the challenge even after the broader Standard & Poor’s 500 index climbed 217 percent over a 70-month period through December.

Melton, co-founder of the Hawaii Stocks and Options Group, ended last year with a 32.6 percent gain in the Hono­lulu Star-Advertiser investment contest. That performance with a hypothetical $20,000 portfolio cemented his standing as the winningest participant in the annual competition, which is ending after a 13-year run. It was his third straight title and sixth crown overall. Besides 2014, Melton’s wins occurred in 2004, 2005, 2007, 2012 and 2013.

"I expect the broad U.S. stock market indexes to rise in 2015 by high single-digit percentages, but the advance will be more erratic than usual," said Melton, whose portfolio in 2014 grew to $26,520.81. "How much longer can stock prices continue to climb without a major correction — a bear market decline of 20 percent or more?"

Barry Hyman, vice president, private client group, for the Maui branch of FIM Group Ltd., finished second with a 14.4 percent gain at $22,888.83. Hyman won the contest three times (2006, 2009, 2010).

Richard Dole, chief executive officer of Hon­o­lulu-based investment bank Dole Capital LLC, finished third with a 4.5 percent gain to $20,901.72. He won the contest in 2011.

And Norm Caris, managing director for Los Angeles-based investment bank B. Riley & Co. and a Kauai resident, saw his portfolio slip 3.9 percent to $19.220.32. Caris won the contest in 2008.

For the year, the Dow had a total return of 10 percent while the S&P 500 index was up 13.7 percent and the Nasdaq composite index was up 14.8 percent.

Melton was the only local expert to post a gain in the fourth quarter, as double-digit increases in his health care, semiconductor and Nasdaq 100 index funds helped boost his portfolio 8.3 percent. His only loser was GoPro, the waterproof camera popular with adventurers. GoPro’s stock soared after its June 26 initial public offering but plunged 32.5 percent during the fourth quarter.

Melton said oil prices, which have plunged 55 percent since June 30, have helped the economy by putting money in consumers’ pockets.

"Gas below $3 a gallon is icing on the cake for consumers, who are enjoying a much-improved job market and the first signs of accelerating wage growth," Melton said. "And they spend roughly 5 percent of their disposable income on energy. Lower energy prices put more money in our pockets, and that’s bullish. Money saved could give retailers a lift, especially those serving low- and middle-income consumers."

But Hyman notes that the oil sector represents "a solid chunk" of the economy that will be hurt by the volatility and unpredictability of falling oil prices. He said fragmented commodity markets, as highlighted by the recent crash in oil prices, will create near-term pressures on the U.S. economy, which has seen the bulk of its recovery either directly or indirectly from the energy boom in the U.S. — whether importing less energy or jobs created in the oil and associated industries. Together with economic and political problems internationally, he sees the U.S. stock market finishing 2015 anywhere from 10 percent up to 30 percent lower.

"Prognosticating on where markets will go is a fool’s errand," Hyman said. "Investors’ financial and investment plans should be built for every possible market outcome."

Hyman’s best performance last quarter was an 11.5 percent gain from Janus Capital, which benefited when bond king Bill Gross joined the investment management company after leaving PIMCO.

The expected rise in interest rates this year will begin to move some of the stimulus that has propped up the U.S. economy, Hyman said.

"Government stimulus, or the reduction of it, is likely to be a major force (in 2015)," Hyman said. "At the short end of the yield curve, the consensus has been that the Fed will begin raising rates in 2015. While that won’t necessarily push longer-term rates up, it will remove some of the alcohol from the punchbowl."

Dole, whose top performer in the fourth quarter was a 38.8 percent gain from Hono­lulu-based ocean shipper Matson, said consumer stocks will benefit from lower oil prices.

"If the market continues to gain, there is likely to be a shift to consumer stocks that are dependent on consumer spending from oil and gas capital spending," Dole said. "However, a collapse in commodity prices usually spells recession.

"When there is a rapid decline in commodity prices such as oil, there is reason for concern. One of the reasons for the decline in commodity prices is the strong U.S. dollar. Concern makes investors cautious, and they require higher risk premiums before investing. This means more market volatility can be expected."

Dole said that while plunging oil prices put more money in the pockets of the consumer, they are likely to disrupt renewable-energy initiatives.

"Investors in renewable energy, domestic oil and gas capital spending projects, and lenders to these projects are vulnerable to shutdowns," he said.

Caris, whose best fourth-quarter performer was BlackBerry (up 10 percent), said the market could be down 5 to 10 percent this year after its long uninterrupted rally. He said U.S. tax reform could help stocks and the economy, but economic and political problems in Ukraine, the Middle East, Greece and the eurozone are not going away.

"The world is still a very uncertain place," he said.

Caris said he expects consumer-oriented names to be the best place to invest this year.

"(They) will be a big beneficiary of both still-high asset prices, which translate directly to high-end consumer spending, and the low price of oil, which acts as a tax break for the lower and middle classes," he said. "I still recommend gold as a hedge given the high levels of global uncertainty."

A LONG LINE OF WINNERS

Champions of the Star-Advertiser’s annual survey of best investment ideas:

* Deceased
** Company was acquired in 2012 and renamed B. Riley & Co.

Notes: 2005: The first year that investors were allowed to change picks at the end of each quarter. 2004: The first year that investors were given a hypothetical $20,000 portfolio. 2002-2003: Investors’ results were calculated by averaging the return of all their selections

YEAR-END FORECASTS

Hawaii stock experts’ 2015 predictions for the three major indexes with their 2014 forecasts in parentheses: