Closing Prices 12/31/2014
S&P 500 INDEX.................................................
US TREASURY BOND
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
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
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%,
Barclays Capital Intermediate Government / Credit Index was up 0.9% during the quarter while the
Barclays Aggregate Bond Index advanced 1.8%.
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
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.
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
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
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
benefit. A focus on global macroeconomic conditions should allow us to book profits in a more volatile
environment. We remain focused on high quality companies, which have clean balance sheets and stable
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
Your financial needs are our highest priority. To meet with a Wealth Management
Advisor, call or visit any of our