2014 in Review - A bullish mood and risks that dot the landscape.
What a predictable and very unpredictable year 2014 was. Yet, that could be said about every year! For starters, the U.S. economy picked up steam throughout 2014, and the S&P 500 Index racked up another double-digit gain following 2013’s 30% advance. The economic forecast was reasonable. Though a call for another double-digit advance may have seemed to be a bit of a stretch, solid market fundamentals have yet to abate – more in a moment.
Still, who would have forecast utilities, which are normally a defensive sector, would lead the way if the S&P 500 Index had posted a double-digit gain? Credit the higher dividends they offer and falling bond yields.
Speaking of bond yields, there has been the rally in Treasury bonds and high-grade corporate debt. Weren’t we supposed to see a continuation in the upward drift in bond yields? At least that was the consensus. It’s Exhibit A as to how markets can and do baffle the best minds. It’s also highlights why diversification among and between asset classes is such an important principle to successful long-term investing.
Finally, few could have predicted the outright collapse in oil prices. We began the year near $100 per barrel and ended just north of $50 per barrel. When and where oil will stabilize is anyone’s guess, but the decline in crude is responsible for the 10% drop in the S&P Energy sector. It was the worst performing of the 10 industry groups that make up the S&P 500 Index.
NASDAQ Composite
-1.16
13.40
22.05
S&P 500 Index
-0.42
11.39
17.86
Russell 2000 Index
2.68
3.53
17.59
MSCI World ex-USA**
-3.40
-6.74
7.41
MSCI Emerging Markets**
-4.82
-4.63
1.43
Source: Wall Street Journal, MSCI.com
*Annualized
**USD
The galloping bull
There were times when we hit a patch of volatility. October quickly comes to mind]. But the fundamentals quickly re-asserted themselves, driving stocks to new highs. These included:
Jeremy Siege noted at year’s end, "The last three, four years, I thought this was easy. I mean, it was a slam dunk. The market was so undervalued with the interest rates so low, and earnings momentum going up. ... Earnings momentum is going up, but we are closer to fair market value."
Siegel is often a featured guest on CNBC and other national news outlets and is a professor at the highly-respected Wharton School of Business. He projected this time last year that the Dow Jones industrials would hit 18,000 by the end of 2014; the index cracked that milestone on December 23. Of course, it’s easy to be a Monday morning quarterback when you’ve accurately called the game, but his analysis is spot on.
Looking ahead, Siegel sees 20,000 on the Dow as a possibility, but he’s quick to point out, “We’re close to fully valued…it gets hard.” His reasoning, “Interest rates are going to be…lower than what the Fed thinks…going forward.”
Before we get carried away with unbridled enthusiasm, it’s fair to point out that Siegel was relatively bullish on stocks as part of a panel discussion that was published by Business Week in May 2000. And it highlights why I never pass up an opportunity to talk about diversification between and among asset classes. No one has a crystal ball. No one can accurately foresee the unexpected events that may derail the most thoughtful forecasts.
But as I already cautioned, let’s not get carried away. Let’s keep a balanced approach. Let’s adjust our approach when changes in your personal situation or goals make our current stance less than optimal.
Bottom line
I always stress the importance of being comfortable with your portfolio. As we’ve talked about in our meetings, my goal is to help you mitigate that risk. But you must be comfortable with the level of risk you’re taking as we set out to meet your objectives. If you are not, let’s talk and recalibrate.
Stick to the plan. Markets rise and markets fall, but unless there have been changes in your circumstances or you’ve hit milestones in your life, such as retirement, stay with the plan. By itself, a record high in stocks isn’t a good reason to bail out of stocks.
Rebalance. Last year’s rise in equities may have knocked you out of alignment with your target stock and bond allocations. Now may be the time to take profits on winners and selectively re-allocate proceeds.
I hope you’ve found this review to be educational and helpful. Let me emphasize, it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
John Davidson, CFP®
Still, who would have forecast utilities, which are normally a defensive sector, would lead the way if the S&P 500 Index had posted a double-digit gain? Credit the higher dividends they offer and falling bond yields.
Speaking of bond yields, there has been the rally in Treasury bonds and high-grade corporate debt. Weren’t we supposed to see a continuation in the upward drift in bond yields? At least that was the consensus. It’s Exhibit A as to how markets can and do baffle the best minds. It’s also highlights why diversification among and between asset classes is such an important principle to successful long-term investing.
Finally, few could have predicted the outright collapse in oil prices. We began the year near $100 per barrel and ended just north of $50 per barrel. When and where oil will stabilize is anyone’s guess, but the decline in crude is responsible for the 10% drop in the S&P Energy sector. It was the worst performing of the 10 industry groups that make up the S&P 500 Index.
NASDAQ Composite
-1.16
13.40
22.05
S&P 500 Index
-0.42
11.39
17.86
Russell 2000 Index
2.68
3.53
17.59
MSCI World ex-USA**
-3.40
-6.74
7.41
MSCI Emerging Markets**
-4.82
-4.63
1.43
Source: Wall Street Journal, MSCI.com
*Annualized
**USD
The galloping bull
There were times when we hit a patch of volatility. October quickly comes to mind]. But the fundamentals quickly re-asserted themselves, driving stocks to new highs. These included:
- An acceleration in economic activity, which led a pickup in earnings growth. S&P 500 earnings improved from a modest increase of 5.6% in Q1 to a solid 10.3% by Q3, according to Thomson Reuters.
- A pledge by the Fed to keep short-term interest rates at rock bottom levels for a “considerable time.” Without drowning you in the tedious details of discounted cash flows, low interest rates provide little in the way of formidable competition for stocks.
- Stock buybacks by corporations continue to rise. According to S&P Dow Jones Indices, combined dividend and buyback expenditures set a new record of $892.66 billion for the 12 months ended September 30, with stock repurchases representing 62% of the total. Stock buybacks reflect confidence as well as real demand for shares.
Jeremy Siege noted at year’s end, "The last three, four years, I thought this was easy. I mean, it was a slam dunk. The market was so undervalued with the interest rates so low, and earnings momentum going up. ... Earnings momentum is going up, but we are closer to fair market value."
Siegel is often a featured guest on CNBC and other national news outlets and is a professor at the highly-respected Wharton School of Business. He projected this time last year that the Dow Jones industrials would hit 18,000 by the end of 2014; the index cracked that milestone on December 23. Of course, it’s easy to be a Monday morning quarterback when you’ve accurately called the game, but his analysis is spot on.
Looking ahead, Siegel sees 20,000 on the Dow as a possibility, but he’s quick to point out, “We’re close to fully valued…it gets hard.” His reasoning, “Interest rates are going to be…lower than what the Fed thinks…going forward.”
Before we get carried away with unbridled enthusiasm, it’s fair to point out that Siegel was relatively bullish on stocks as part of a panel discussion that was published by Business Week in May 2000. And it highlights why I never pass up an opportunity to talk about diversification between and among asset classes. No one has a crystal ball. No one can accurately foresee the unexpected events that may derail the most thoughtful forecasts.
But as I already cautioned, let’s not get carried away. Let’s keep a balanced approach. Let’s adjust our approach when changes in your personal situation or goals make our current stance less than optimal.
Bottom line
I always stress the importance of being comfortable with your portfolio. As we’ve talked about in our meetings, my goal is to help you mitigate that risk. But you must be comfortable with the level of risk you’re taking as we set out to meet your objectives. If you are not, let’s talk and recalibrate.
Stick to the plan. Markets rise and markets fall, but unless there have been changes in your circumstances or you’ve hit milestones in your life, such as retirement, stay with the plan. By itself, a record high in stocks isn’t a good reason to bail out of stocks.
Rebalance. Last year’s rise in equities may have knocked you out of alignment with your target stock and bond allocations. Now may be the time to take profits on winners and selectively re-allocate proceeds.
I hope you’ve found this review to be educational and helpful. Let me emphasize, it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
John Davidson, CFP®