Newsletter: January 2015


Newsletter: January 2015

We hope everyone enjoyed the holidays, and now it is back to the grindstone.  While we try to keep our eyes and minds focused on the road ahead, rather than the rearview mirror, we will take a few moments to reflect on the 2014 markets and economy.

A look in the rearview mirror – 2014 review

We ended the full year with client portfolio gains across the board.  That being said it was not easy – it was another volatile (and oftentimes very scary) year!  The Ukraine-Russia standoff, Ebola scare, global terrorism with ISIS, oil/gas price plummet, fears of the Fed raising rates, signs of a global economic slowdown, etc. all contributed to four -5%+ declines.  At each downturn many market pundits predicted further declines (even crashes).  However, the markets proved resilient.

Though often difficult, investors who absorbed the punches (i.e did not sell during periods of panic) were rewarded.  In all four of the market sell-offs in 2014, a V-shape recovery followed, rewarding investors who did not go into cash, or even worse, tried to short the market (i.e. bet on a market decline – “bear market” funds as a category were down over -23% for the year).

While US markets, as a whole, had a strong year performance-wise, the overall bag was certainty mixed.  International investments, precious metals, and commodities produced negative returns.  Inflation protection strategies performed very poorly.  Fixed-income (bond) investors overall had a positive but lagging year, as did hedge funds.

How/Why did the markets have a positive year in 2014?  The truth is that economic data generally improved in 2014.  For example, according to Thomson Reuters, 74% of S&P 500 companies (representing the largest 500 publicly traded companies in the United States) reported earnings that beat analyst expectations.  Along a similar vein, 59% of companies reported 2014 revenues that beat expectations.  According to the Bureau of Economic Analysis, the economy picked up some steam with real GDP growing by an annualized rate of +5.9% in Q3 2014.  The unemployment rate ended the year at 5.8%, significantly better than what economists were predicting.  Finally, the company dividend increase-to-dividend cut ratio ran at a 15-to-1 clip (i.e., many more companies increased their dividends during the year) – the exact opposite of the dividend changes in 2009.

Moving forward – 2015 outlook

Unfortunately, we are off to a punky start in 2015.  In fact, it is very similar to the pattern in 2014, where the markets were down -3.5% in January 2014.  However, we believe many of the themes that dominated 2014 will continue in 2015.  With the “wall of worry” intact (i.e. low expectations), we believe equity markets will outperform other asset classes in 2014.  Unfortunately, to capture the gains, one must cope with the inevitable volatility that spikes whenever an event comes along that spooks investors.

In 2015, not surprisingly, we prefer equities over bonds, commodities, and precious metals.  We believe economic conditions will be okay in 2015, and recommend allocations that capitalize on a slowly improving economy.  This involves investing in “economically-sensitive” areas – such as consumer discretionary, industrials, and technology.  We also continue to employ our hedging strategy for many clients, producing income and reducing volatility in their portfolios.  This allocation has worked well for our clients and we see no compelling reason to deviate from this strategy. 

There will be a time to lighten up on the market, but we believe the time is not now (maybe later this year?).  We believe this market will run out of gas when investor speculation picks up, leading economic indicators are rolling over, and investor expectations are out-of-line.  We have yet to see these “topping out” signals.  Despite 2014’s gains, the markets are still fairly valued from a fundamental perspective.  Fortunately, the global turmoil has not substantially impacted the US economy (but we are watching these events very closely).  Most importantly for the markets, a healthy level of investor fear still abounds.

We clearly recognize the folly of making bold market and economic predictions.  Baseball legend Casey Stengel had some good advice regarding making predictions – “Never make predictions, especially about the future”.  Rather, we will rely on the investment strategies that are steeped in well-founded principles that have worked over many decades.

Group News/Update

As of 12/31/14, after 12+ years with the group, Bill Pharr has retired.  We thank Bill for his wonderful and exemplary service for many years, and wish him well in retirement.  We are all going to really miss him - Thank you Bill!

In addition, Patrick Donnelly, after graduating from Claremont-McKenna and completing/passing his three securities exams, has joined our group as an Associate.  We are very excited to have him on our team!

As always, feel free to contact us any time to review your overall situation and particular needs.  We offer both portfolio management and financial planning (plus good old fashioned general advice) as part of our basket of client services.

If you would like to inform us of any updated contact information, please let us know as well.

Thank you, we wish you all the best in 2015,

Doug, Victoria, Ross, and Patrick (the Madison Park Advisors Team)