While market participants and forecasters had their share of
surprises and disappointments in 2014, many investors were rewarded as U.S.
stocks had a solid year overall. The Dow Jones Industrial Average was up 7.5%
in 2014 while the S&P 500 experienced its third straight annual increase of
over 10%. These two major indexes outperformed the broader market—the NYSE
Composite Index rose a little more than 4% for the year.
Perhaps one of the more telling signs for 2015 was that the bull
rested on the last two days of the trading year. In fact, U.S. stocks took most of the last
week of 2014 off, finishing more than 1% lower.
This prompted many market analysts to predict that 2015 could bring a
return to more volatility than investors experienced in 2014.
Bond investors also fared well in 2014. Thanks to slowing economic growth and
declining inflation—especially in Europe—bond prices rose and yields fell. Bonds were also helped when the Federal
Reserve signaled that even though they ended their stimulus efforts, they were
in no hurry to raise short-term interest rates.
This added to the year’s bullish rally for income investors whose
holdings were in government or investment grade bonds. Those who invested in sub-investment grade
bonds did not fare as well.
Let’s review some notable highlights from 2014:
·
January 31st – The New Year begins badly, as aftershocks from a sell-off in
emerging markets hit the U.S.
·
February 3rd – Leadership
of the Federal Reserve passes to Janet Yellen, but Ben Bernake’s policies still
rule.
·
February 28th – Russian leader Vladimir
Putin invades Crimea, sowing regional turmoil as the West shudders.
·
July 3rd – First day the Dow Jones
Industrial Average closes above 17,000.
·
July 23rd – Oil prices peak at over $100 a barrel before sliding more than 40%
in the second half to under $55.
·
September 26th – Bond titan Bill Gross leaves Pimco for Janus, sparking huge
redemptions at his old firm.
·
October 31st – Bank of Japan’s Haruhiko Kuroda grabs the baton from the Fed and
doubles down on monetary stimulus.
·
November 4th – Republicans gain control of both the House and
the Senate as a rebuke to President Obama.
·
December 23rd – First day the Dow Jones Industrial Average closes above 18,000.
(Source: Barron’s, 12/2014)
Financial
experts are pointing to the fact that we are experiencing falling unemployment,
rising stock prices and an uptick in housing starts. Although at first many predictions for 2014
were met with skepticism, it would be difficult to argue with the average
strategists’ 2013 prediction for a 10% rally in 2014.
Looking Ahead to 2015
Although
there are still some strong contrarians, the consensus for 2015 appears to be
bullish:
·
The U.S. economy will move forward
·
Unemployment figures will go lower
·
The European economy will get better
·
Japan’s recession will ease
·
The Fed will raise the
federal funds rates
·
Stocks will remain attractive compared to U.S. Treasuries
Bob Doll,
senior portfolio manager and chief equity strategist of Nuveen Asset Management,
believes 2015 will be a good economic year, with low inflation, consumer
spending picking up, an improving job market, and solid earnings growth. The
biggest risk, however, is the risk of deflation outside the U.S., led by a
decline in oil prices. (Source:
WealthManagement.com, 1/2015)
While it’s
easy for investors to want U.S. stocks to have another strong year in 2015, we
still need to remember that the current bull market started in 2009. In fact, some
analysts conclude that stocks are no longer cheap—and under certain financial
metrics valuations, are high. According
to Bloomberg, after gaining 10% in 2014, consensus earnings-per-share growth
for U.S. corporations is expected at 8% in 2015.
Interest Rates
Interest rates will play a role for investors again in 2015. The Federal Reserve has already signaled that
it plans to raise interest rates and phase out the easy money policies that
were designed to stimulate the faltering economy from the 2008 financial
crisis. Having said that, their timeline
for doing so still remains uncertain and financial experts are split on whether
interest rates will actually go up in 2015.
(Source: Wall street Journal 12/2014)
Jurrien
Timmer, Director of Global Macro in Fidelity's Global Asset Allocation Division,
says that “Federal Reserve uncertainty could mean more volatility for
investors.”
Remember—in
many cases, bonds are supposed to provide portfolios with stability and
hopefully help against stock market swings.
Conservative investors should not try to chase speculative returns in
bonds.
In their 2015
Investment Outlook, Delaware Investments wrote, “We believe returns will be
lower than they have been in recent years.”
They say that bond investing “will be transitioning into a new reality,
one in which return expectations ought to be tempered.”
As
financial professionals, we intend to be very watchful of both the Federal
Reserve’s movements and interest rates this year. We would be glad to recheck
your personal situation during your next review or at any other time.
Oil Prices
Energy
stocks have been among the year’s worst performers, as oil prices declined
almost 50% from their mid-year peak of over $100 a barrel. Many investors are questioning if there are
bargains in beaten-down energy shares. Some
analysts see value, while others fear that oil prices still have to stabilize.
Lower oil prices help consumers at the pump, but they can wreak real havoc on
unemployment, capital spending, loan collateral values, energy-company balance
sheets and the junk-bond market.
“It’s not clear that anyone can answer how low [oil prices] will
go,” said Ed Morse, global
head of commodities research for Citigroup Inc. Oil prices and their
fluctuations can create market disruption and uncertainty. Oil prices will be
on the list of items that we will monitor in 2015.
(Source: Bloomberg.com, 1/2015)
International Concerns
For many market strategists, the bullish case for equities
includes a stronger European economy and the end of the current recession in
Japan. Most analysts feel that the
European Central Bank will follow the Federal Reserve’s example and provide Quantitative
Easing and an asset buying program. These measures allow the European Central
Bank to bolster their countries’ money markets.
(Source: Barron’s, 12/2014)
Russia and China also present concerns for investors. Russia “is in bad shape, due to lower oil
prices, but it wants to remain relevant on the world stage,” according to John
Praveen of Prudential International Investment Advisors. He and others also caution that China will be
another concern—investors will need to see if the Chinese central bank can
provide sufficient stimulus to help their economy continue its expansion in
2015.
(Source: Barron’s, 12/2014)
U.S. Politics
As we head into 2015, the political landscape in the U.S. has changed
dramatically. Following six years of gridlock and brinksmanship, 2015 could prove
to be a very interesting one, with Republicans taking control of both the House
and the Senate. Analysts are predicting an active year in Washington. President
Obama only has 24 months remaining to cement his legacy. Analysts feel that comprehensive tax reform,
especially closing some loopholes and revamping corporate taxes, could prove to
be a big win for investors.
(Source: Barron’s, 1/2015)
Conclusion: What Should
an Investor Do?
an Investor Do?
Although the U.S. stock market isn’t filled with bargains, most
analysts see the potential for U.S. stock market gains in 2015. Jurrien Timmer, Director of Global Macro in
Fidelity's Global Asset Allocation Division, encourages investors to “continue
to view the U.S. market as the best house on the street. As we all know, the
best house is usually the most expensive, and for good reason.” While many
analysts are predicting growth for U.S. stocks, that growth might not come
easily. In the last three years the
S&P 500 has risen from a humble 11.7 times next-four-quarter earnings
estimates to an ambitious 16.5 times.
Investors might be best served structuring their portfolios to weather
stock market turbulence.
(Source: Barron’s, 12/2014)
Continue to be watchful. Even the
most optimistic investors need to be aware of some of the warning signs.
Focus
on your own personal objectives. During confusing times it
is always wise to create realistic time horizons and return expectations for your
own personal situation and to adjust your investments accordingly. Understanding your personal commitments and
categorizing your investments into near-term, short-term and longer-term can be
helpful.
Be
cautious with income investments. While some income investors
did well in 2014, this year the menu could be less attractive. With the Federal
Reserve and interest rates in the spotlight, this is a good time to understand
your true income and cash flow needs.
Don’t try to predict the market. Investment decisions driven by
emotion can cause problems for investors.
Discipline and perspective can help investors remain committed to their long-term
investment programs through periods of market uncertainty.
Discuss any concerns with us.
Our
advice is not one-size-fits-all. We will always consider your feelings about
risk and the markets and review your unique financial situation when making recommendations.
We pride ourselves in offering:
·
a schedule of regular client meetings, and
·
continuing education for every member of our team on the issues
that affect our clients.
A good financial advisor can help make your journey easier. Our goal is to understand our clients’ needs and then try to create a plan
to address those needs. We continually
monitor your portfolio. While we cannot control financial markets or interest
rates, we keep a watchful eye on them. No one can predict the future with
complete accuracy, so we keep the lines of communication open with our
clients. Our primary objective is to
take the emotions out of investing for our clients. We can discuss your
specific situation at your next review meeting or you can call to schedule an
appointment. As always, we appreciate the opportunity to assist you in addressing
your financial matters.
