(315) 624-7300 / Email Us
Ascent Wealth Partners
  • Home
  • Investing
  • Planning
  • 401(k)
  • Knowledge
  • Team
    • Brad Kowalczyk
    • Mark Moshier
    • Scott McCartney
    • Doug Bissonette
    • Neil Edmonds
    • Joe Summa
    • Nancy Kowalczyk
    • Chris Lai
    • Tim Welchons
    • Steve Basile
    • Connie Benson
  • My Account
    • Schwab Login
  • Contact Us
  • Form-CRS
Ascent Wealth Partners
  • Home
  • Investing
  • Planning
  • 401(k)
  • Knowledge
  • Team
    • Brad Kowalczyk
    • Mark Moshier
    • Scott McCartney
    • Doug Bissonette
    • Neil Edmonds
    • Joe Summa
    • Nancy Kowalczyk
    • Chris Lai
    • Tim Welchons
    • Steve Basile
    • Connie Benson
  • My Account
    • Schwab Login
  • Contact Us
  • Form-CRS
Home Scott McCartney A 2014 Recap
Back Home

A 2014 Recap

byAscentadmin inScott McCartney posted onJanuary 27, 2015
0
0
A 2014 Recap

The domestic economy turned convincingly toward expansion in the back half of 2014, led by a 5.0% gain in GDP for the third quarter. The year’s fourth quarter GDP results are not yet in, but estimates call for further growth, in the 3.0 –3.5% range. Encouragingly, the labor market has continued to firm, and both workweeks and wages are growing over the year-ago period, albeit at a still-modest clip. Two more tailwinds are apparent for the economy, lower energy prices and continued low interest rates; more on those in a moment.

Buoyed by solid earnings growth in 2014, the US stock market turned in another good year, led by large companies. Overseas markets did not fare so well, hurt by sluggish growth and weak currencies versus the dollar.

Divergent Economies –A Quick Trip around the World

In contrast to an improving US economy, much of the rest of the world is struggling with slow growth.Policymakers are scrambling to address the condition. In Europe, the Eurozone (EZ)is beset with multiple issues –sluggish growth overall, with France and Italy in recession, and Germany nearing stall speed; falling price levels across the region, with outright deflation a worrisome possibility; and political and financial uncertainty issuing once again from Greece, which is at risk of defaulting on its debt commitments. A central problem to the EZ is its disconnect of currency union (i.e., the Euro) to political union (nineteen independently governed nations, and national agendas). In this mix, the European Central Bank tries to be the monetary glue for a fractious and creaky system. The ECB is widely expected to announce a Quantitative Easing package for the region later this month.

Japan has undertaken radical policies intended to reverse two decades of relative stagnation. “Abenomics” describes a three-pronged package of deficit spending, monetary stimulus and corporate reforms intended to boost growth and price levels. Similar to Europe, Japan is contending with deflation. The Bank of Japan is buying both government debt and public equities; printing electronic money to buy assets, and cycling the new money to the financial system. The Japanese stock market set new highs in 2014, accompanied (rather predictably) by weakness in the Yen. Japan is playing a high-stakes policy game with a compromised economy. With a public debt level 2.5x the size of its economy, no other industrialized nation comes close to Japan’s current indebtedness. Japan’s population is rapidly aging, and the country has lost jobs to lower-cost Asian competitors. Abenomics remains an experiment in progress, with unpredictable outcomes.

A sampling of emerging market (EM) economies shows their uneven prospects. China’s official growth rate slowed to 7.3% in the third quarter, the most recent period available. Its infrastructure boom has clearly come off the boil, as evidenced by broad weakening in commodity prices. Low commodity prices have, in turn, pressured economies in South America, and also Russia. Elsewhere in the EM, the 2014 election in India of pro-business Prime Minister Modi has helped to stoke economic confidence in that country. Mexico’s substantial linkages to the US economy, plus reforms in the Mexican energy sector, should help with growth in that nation. South Korea is sluggish, hurt by slowdowns in its export car industry, and at electronics giant Samsung. Overall, we rate the EM sector as a mixed bag.

The Energy Dividend

The ongoing collapse in oil prices that began in 2014’s second half has been historic. Prices remain in a downtrend, falling for Brent crude from $112 per barrel at mid-year to a current $45. Excess supplies from overproduction have clearly taken their toll,and concerns over weakening global demand have further weighed on price. Saudi Arabia is often a “swing” producer that throttles its crude production to balance the market, but has announced no cuts,and is willing to endure a price war in the short term to curtail US shale production.

In the present, output levels are high across OPEC, Russia and the US, with cash-hungry producers trying to sell every barrel they can, despite the falling price. As time and low prices grind on, however, higher-cost producers will gradually be forced to leave the market, and new projects will be deferred or cancelled.And thus will supply correct; nothing cures low prices like low prices, as the saying goes.Our expectation is for low prices throughout 2015, and their eventual resettlement at much lower levels than the triple digits of recent years, perhaps in the $60-$70 range.

Given the collapse in prices, the domestic oil boom of the last several years is threatening to come to an abrupt halt. Oil production fromshale formations is costly, and it needs high prices to thrive. In a “lower for longer” oil price scenario, expect to see something of a bust in the new oil patches of North Dakota, and the Eagle Ford, Texas, with job losses, bank loans, and local real estate prices among the casualties.

The pain in the oil patch is offset by the gain to the consumer.Falling gasoline prices have been a welcome windfall to the average household, saving individuals and families $500 -$1,000 annually or more, depending on their driving patterns. (As a reminder, the median household income in the US is a bit more than about $52,000 annually. To millions of people, these as savings represent significant money.) Unlike the heady gains in financial assets the last few years, which have tended to accrue to wealthier households, the advent of lower gas prices is truly a democratizing event; anyone who drives gains a benefit, with lower income consumers benefiting disproportionately. Along with an improving jobs picture, the break in gas prices should be a significant boost for the consumer economy in the US.

Rock Bottom Rates

Despite the encouraging growth in the US, interest rates remain low –very low. The 10-year US Treasury bond yields about 2%. That’s it –an investor lending her money to the government will get 2% annually, barely above the rate of inflation, and about the same dividend rate as she’d get from owning the stocks in the S&P 500, without the added upside potential from stock market gains. As we all know, short term rates are close to nil, although the Fed is widely expected to begin hiking rates sometime in 2015.

A pickup in inflation, any pickup in inflation, would serve to boost interest rates, but none is apparent.Shrinking energy prices are having the opposite effect, serving up lower inflation, or at least an offset to price rises elsewhere in the consumer’s market basket. Labor markets are often a source of inflation pressures, but ours is only now returning to a sense of normalcy after the 08-09 financial crisis. High-skilled jobs are seeing wage gains, but the broadest swath of middle-skill and lower-skill jobs have much more limited bargaining power. At the risk of over-generalizing, there is too much supply of most things, and not enough demand for too many things, all around the world. Add to that equation the incredible disruption to pricing and margins from internet-based commerce -thank you, Amazon.com –and we are hard-pressed to suggest when and where broad-based inflation rears its head once again (although it surely shall).

In our globalized investing world, yield conditions overseas also serve as something of a governor to our rates in the US. Rates overseas are exceptionallylow, reflecting slow economies and deflation worries. Japanese 10-year government bonds yield about 0.30%. That is not a misprint. German 10-year bonds yield 0.45%. Global investors in those countries have great incentive to own 2% US Treasurys in preference to their home marketbonds. The investors will pick up significant yield owning the US bond, and if the dollar appreciates relative to the Yen and Euro as is widely expected, the Japanese and German investors will gain further from changes in currency values. Simply put, overseas demand may well serve to cap our interest rates here at home, unless and until our economy begins to overheat through supply bottlenecks or excessive credit growth.Only then might interest rates move materially higher.

A Brief Update on Our Strategy

The improving jobs market, energy savings, and a degree of pent-up demand for housing should all help to drive consumer-led growth domestically. In the US, we do not see precursors to a slowdown, and we expect the economy to continue its expansion in 2015. Our recent moves have included trimming our exposure to the energy patch, and deploying capital to various health care, technology, and consumer-levered exposures. We are neutral on the financial sector –there we believe negatives and positives on the sector are roughly in balance. We are incrementally less positive, as well, on industrial names, as many are facing the twin headwinds of slowing overseas growth and the strong dollar.

What benefits “Main Street” may not flow directly to Wall Street.Forward earnings estimates are in elevated flux due to the fall in oil and the surging US dollar. While consumer-levered names are poised for stronger profits, energy companies’ earnings are due for a severe haircut in 2015, and the impact of the strong dollar on multi-national companies’ profits is a wild card at present.

Based solely on valuation, the stock market is less attractive than at this time a year ago.We think the S&P 500 is trading at about 16x forward earnings; hardly a bargain, but fair, if growth remains firm. Quarterly earnings season should prove to be a confessional for a good swath of the S&P 500. Companies and investors alike will likely need a few quarters of the present low oil / strong dollar regime to understand the flow-through impacts to overall corporate earnings, and in turn, to assess just how expensive stocks are (or are not). Full valuations are apparent across much of the market, including utilities, food, household product, and personal care companies. At present, we believe the “average” stock to b efully priced. We are looking hard to find compelling values.

Despite positive trends in the US, we are watching developments overseas carefully. Currently, for the “price is truth” crowd, the global market is telling us, through interest rates, that growth is expected to be slow, and consumer prices are expected to fall. We know that the non-US portion of the world economy is presently under stress. Both politicians and central bankers alike are adjusting policies to address growth and deflation challenges. What investors need to keep in mind is that the risks of policy error (e.g., central banks getting it wrong), and the consequences, are also heightened. A key question will be the degree to which the US can decouple from overseas weakness, should the latter prove protracted.

Scott C. McCartney, CFA
Chief Investment Officer

Share:

Previous

Market Currents- 01/06/2015

Next

Market Currents- 07/30/2015

Related Posts

Giving Thanks and Feeling Hope
November 25, 2020
Giving Thanks and Feeling Hope
No Comments
Remote Work Notification
March 19, 2020
Remote Work Notification
No Comments
2022 Outlook
January 14, 2022
2022 Outlook
No Comments

Leave a Comment Cancel reply

Your email address will not be published. Required fields are marked *

Archives

  • March 2023
  • February 2023
  • January 2023
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • January 2021
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • October 2017
  • September 2017
  • July 2017
  • May 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • August 2016
  • July 2016
  • June 2016
  • April 2016
  • February 2016
  • January 2016
  • November 2015
  • September 2015
  • July 2015
  • January 2015
  • November 2014
  • September 2014
  • May 2014
  • October 2013
  • June 2013
  • November 2012
  • May 2012
  • March 2012

Recent Posts

  • What Is Your Cash Doing For You?
  • Market Currents – 2/7/23
  • Market Currents – 1/12/23

Contact Us

  • Address
    NEW HARTFORD: 89 Genesee Street | New Hartford, NY 13413 | 315.624.7300

    ELMIRA: 1225 W. Water Street, Suite 1 | Elmira, NY 14905 | 607.734.2002

    SARATOGA: 16 Lake Avenue | Saratoga Springs, NY 12866 | 518.306.4220
  • Home
  • Investing
  • Planning
  • 401(k)
  • Team
  • Contact Us
  • Terms of use

Recent Posts

  • What Is Your Cash Doing For You? March 7, 2023
  • Market Currents – 2/7/23 February 7, 2023
  • Market Currents – 1/12/23 January 12, 2023
  • Strategizing For 2023 January 6, 2023

Login To Your Schwab Account

Copyright © 2023 Ascent Wealth Partners. All Rights Reserved.