Even though U.S. equity markets closed out 2014 on a soft note, ending figures for both the DJIA and S&P 500 were just a stone throw away from all-time highs. As fundamentalists, we recognize that 2014 returns were beyond our expectations, similar to our perspective in 2013. We don’t mind erring on the conservative side since recent market surprises still have a positive impact on our client portfolios. We are comfortable with our approach knowing that we are extremely averse to erring on the upside and having the market move against us. One should not forget the devastating effects from the Technology Bubble and the Financial Crisis which are constant reminders for the basis of our conservative nature.
Our belief that U.S. equity markets continue to be overvalued drives our cautious approach in the allocation decision to equities. In 2014, this has contributed to lower, yet expected, overall portfolio returns relative to the S&P 500 and will continue to do so in 2015 should equity markets continue to rise without consideration of fundamentals. Even the concept of diversification has contributed to lower portfolio returns as measured against the S&P 500 since the benchmark has recently been one of the top performing asset classes across all asset classes.
As oil prices continue to slide to all-time lows since 2009, negative possibilities are emerging that may threaten capital markets on a global basis. Foreign governments that are strongly tied to oil revenue are scrambling to revise budgets accounting for lower oil prices. The result is a pattern of reduced fiscal spending which can be a factor in dragging down foreign economic growth. On the domestic front, the concern about high yield bonds is making itself known due to the amount of issuers within the oil & gas sector. We have only mentioned two areas out of many, knowing the negative fallout can spread like a virus.
Our belief that lower oil prices will provide additional purchasing power for U.S. consumers is confirmed by other analysts who have come up with estimates of up to 0.5% as an annual increase to GDP growth. Combining this with an improving U.S. employment scenario is definitely positive news but we can’t ignore the possibility of corporate earnings being hurt by a stronger U.S. dollar. We are patiently waiting for the earnings season to start which should provide us with a better indication as to the direction of capital markets.
It appears the U.S. consumer is to play a major role in driving economic growth, both domestic and foreign. As one of our colleagues has stated, “The world is looking to the American consumer as the engine to drive global economic growth.” Lower fuel prices and the stronger U.S. dollar should provide the catalysts needed.
Lastly, we would like to thank everyone who attended our Annual Open House Event and making it an occasion that is truly enjoyable for all. The first Round Table Discussion for 2015 will be held in late April. To ensure that you are invited to future events, please reach out to Leslie Tritschler in our office at 484-320-6300. We would like to wish everyone a Happy New Year as we start 2015!
