Review and Outlook

Winter 2014

Investor's Update

Closing Prices 12/31/2014
S&P 500 INDEX.................................................
Current Yield - 10 year bond.................................................
Current Yield - 30 year bond.................................................
Past performance is no guarantee of future results and investing involves risk, including the possible loss of principle.

The surprisingly strong expansion in the third quarter rolled into the final months of the year. This, coupled with expectations for an increase in consumer spending due to a dramatic drop in oil prices, resulted in another positive quarter in most major equity averages. Small cap stocks played catch-up with the Russell 2000 posting a 9.7% return, while the market cap weighted S&P, with income, advanced 4.9%. The DJIA and Nasdaq rose 5.2% and 5.8%, respectively, during the quarter. Global economic data continued to underwhelm which resulted in sizeable pullbacks as shown in the iShares MSCI EAFE Index Fund and iShares MSCI Emerging Markets Index Fund losses of 3.5% and 4.6%, respectively. The expansion in the U.S. continued to attract foreign capital as the U.S. Dollar Index rallied 5.0%.

On a yearly basis, the S&P 500, with income, advanced 13.68% as Utilities, Health Care and Technology led the way with 24.3%, 23.3% and 18.2% gains. However, Energy and Telecom were laggards with losses of 10.0% and 1.9%. Oil prices crashed, dropping from a June high of $107.26 to close the year at $53.27. The unemployment rate improved, moving from 6.7% to 5.8% as of November. Mergers and acquisitions set a record in terms of volume, while the IPO market saw a 55% increase from 2013 resulting in the highest issuance level since the dotcom bubble of 2000. Gold ended essentially unchanged at $1,184.86 but had a $240 trading range throughout the year.

With the Federal Reserve ending its Quantitative Easing program, investors have now shifted their focus on when policy will be normalized in the form of rising Fed Funds rate in 2015. Low rates internationally and a stronger currency in the U.S. created a wave of liquidity entering the domestic marketplace which kept a lid on interest rates during the quarter. The 10-year and 30-year Treasury yields dropped 34 and 46 basis points to end at 2.17% and 2.75%, respectively. The Barclays Capital Intermediate Government / Credit Index was up 0.9% during the quarter while the longer duration Barclays Aggregate Bond Index advanced 1.8%.

Economic Outlook

With the caveat that anything can happen, it certainly seems like a rosy economic scenario has continued to unfold for the Federal Reserve, and therefore investors. Oil prices were expected to come down but not this far, this fast. Resultantly, inflation statistics should remain well below the level of concern. Global interest rates remain extremely competitive as Germany, Japan, Italy, and United Kingdom 10 year yields are at 0.54%, 0.32%, 1.88% and 1.76% while the U.S. comparable closed at 2.17%. This should keep interest rates tame and may even cause a further drop in local markets. Earnings, outside of Energy related companies, are expanding at a steady pace. Employment reports continue to show a stable growth trend with minimal concern for excessive wage growth. This will allow the Fed to be accommodative as long as possible and promote the pro-growth environment. Internationally, Central bank policies are all pointing to pro-growth programs that are just now ramping up. The case for a bear market anytime soon is difficult to see. Furthermore, with interest rates this low and global growth still in question, the U.S. equity market looks to be the best place to look for positive returns.

It appears that the aforementioned positive factors are mostly priced in to the markets. Excessive bullish posturing from money managers is starting to show up in sentiment statistics. The U.S. equity market has now posted six straight years of positive returns. Valuation metrics are neutral at best. When much of the investing world expects nothing but great conditions, it’s usually time to take some profits. There are many scenarios that could derail this market. Geopolitical concerns are always prevalent, especially with Russia being backed into a corner and continued unrest in the Middle East. The continued strength of the U.S. dollar could cause dislocations in currency markets and revenue misses from multinational corporations not positioned correctly. Deflation in the Eurozone is a real threat and could wreak havoc if the bickering between neighboring countries continues. A sharp drop in oil is typically a precursor to a slowing economy. At minimum, some jobs will be lost as the boom in shale production realizes massive capital expenditure cuts. A pause in the equity market rally that refreshes would be welcome news.

The final update to the third quarter GDP report showed a robust 5.0% advancement, which followed a 4.6% posting in the second quarter. We expect a more normalized trend going forward, likely in the 2.5% - 3.0% range with an upward bias if the “rosy economic scenario” discussed continues. Interest rates should remain range bound as well, with a slight bias towards the lower end if oil prices continue to keep inflation metrics depressed in the near-term.

Capital Market Analysis

Broad participation has been lacking for much of the year, even though the S&P 500 has posted 53 record high closes. Volatility has increased since the Fed ended the latest Quantitative Easing Program and is expected to continue throughout 2015. Sector correlations are finally starting to deviate. This type of environment is conducive to rotations with altering leadership roles. Individual selection will remain critical as the rising tide that lifted all shares together is unwound. Industry and stock specific catalysts will be paramount to reap further gains in equities. Many stocks have gotten ahead of themselves, but still boast profit measures that should continue. We expect another positive year for equities but one that will test investor’s patience with wider swings in the major averages.

Fed tightening is nearly priced in for the second half of 2015, but the timing could be altered. More important for investors is the pace, frequency and size of those rates hikes, not the absolute timing. Assuming economic conditions remain stable, a normalized Fed Policy can be a net positive for the market. However, there is always a risk that the Fed goes too far too fast. A flattening yield curve could persist while global deflationary forces keep a lid on longer term interest rates as the Fed raise short rates domestically.


A steadily advancing economy with stable employment and range bound interest rates is likely to lead to another advance to new highs in the major averages. However, global economic conditions need to improve if we are to collectively benefit. A focus on global macroeconomic conditions should allow us to book profits in a more volatile investment environment. We remain focused on high quality companies, which have clean balance sheets and stable dividends. Stock selection will remain paramount. Fixed income investors will continue to benefit from exposure to high quality securities with a neutral duration.

We appreciate your confidence and business. Please do not hesitate to call us if you have any questions or if we can be of assistance.

Barclays Capital Intermediate Government/Credit Index:
An unmanaged index based on all publicly issued intermediate government and corporate debt securities with maturities of 1-10 years. This index represents asset types which are subject to risk, including loss of principal.
Dow Jones Industrial Average:
The most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials
NASDAQ Composite Index:
Measures all NASDAQ domestic and international based common type stocks listed on The Nasdaq Stock Market. The NASDAQ Composite is calculated under a market capitalization weighted methodology index.
Standard and Poor's 500 Index:
Capitalization-weighted index of 500 stocks, including the reinvestment of dividends and other distributions, designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Barclays US Aggregate Bond Index:
The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Your financial needs are our highest priority. To meet with a Wealth Management Advisor, call or visit any of our Regional Offices.

  • Securities, insurance products, and investment advisory services are offered through Valley Forge Asset Management, LLC. (VFAM) and is a SEC registered investment advisor, a registered broker-dealer (Member FINRA & SIPC), and a licensed insurance agency. VFAM is a wholly owned subsidiary & non-bank affiliate of Susquehanna Bancshares, Inc. (SBI).
  • Susquehanna Wealth Management® is a registered service mark of Susquehanna Bancshares, Inc.

Securities and Insurance Products Are:
• Not FDIC Insured  • May Lose Value  • Not Bank Guaranteed
• Not a Deposit  • Not Insured by any Federal Government Entity