We are encountering renewed volatility as we welcome the last quarter of 2014. However, this isn’t much of a surprise due to our belief that current market valuations are at a premium. Domestic markets continue to digest positive news concerning our economy, but we are constantly reminded of the negative global events that can easily slow it down. Let us visit a few variables that must be monitored as we address the main question: “Will the strength of our economy be sufficient to sustain any negative impact caused by foreign events?”
Let’s start with the sanctions on Russia which will have a significant impact on Europe. This has been confirmed by the auto industry’s recent disclosure of negative adjustments made to profitability projections for that region. We believe the combination of a weaker European economy and the stronger U.S. Dollar’s impact on U.S. exports will be reflected in domestic corporate earnings for the next few quarters. In addition to higher prices for U.S. products overseas, the repatriation of funds from foreign operations will also be negatively impacted due to exchange rates.
Another variable we are monitoring very closely is the price of oil which has remained at lower levels due to healthy inventory reports and the strength of the U.S. Dollar. Current oil prices have put downward pressure on various components of the energy sector, i.e. major oil companies and oil & gas exploration. Let’s not forget that some companies are directly impacted by orders to discontinue business operations as part of imposed sanctions. We do believe there are long-term opportunities in these areas but remain cautious in the short-term.
There is one positive from lower oil prices as it translates into lower gas prices. This will provide greater purchasing power for American consumers which will be an important driver of near-term economic growth within our country. It was only a few years ago that we looked to other regions of the world to support the growth of our economy. Now, these same regions are looking to the U.S. hoping that American consumers will increase their consumption of cheaper foreign goods due to favorable exchange rates.
It’s also worthwhile to mention that we see subtle changes in flight to safety patterns involving bonds. During recent waves of volatility we are starting to see funds flow to bonds, including municipal bonds, as safety vehicles. This is something we haven’t observed over the past year due to extreme fears of rising interest rates. It appears this aversion to bonds has slowly subsided as we internalized the news regarding the Fed’s phase out of bond purchases. It’s great to see interest rates settle down in a comfortable range and we expect future interest rate moves to be based on typical factors such as inflation and GDP growth.
As a reminder, ongoing communication is highly recommended to determine the direction of your portfolio, so please reach out to your consultant should you have any questions.
Lastly, we would like to thank everyone who attended our most recent Round Table Discussion (RTD) event. It was a fantastic session due to the topics covered and attendee participation. If you are interested in attending a future RTD event, please notify your consultant or contact Leslie Tritschler at our office: 484-320-6300.