The US economy started 2014 slow but accelerated throughout the year. US GDP growth accelerated after a negative 1st Quarter to reach 4.4% and 5% GDP growth respectively, in the 2nd and 3rd quarters. Plunging oil prices, low inflation, low interest rates, growing consumer confidence and a strong US dollar all fueled stronger US growth. US investors continued to climb a wall of worry during the year which included; the early 2014 winter storms, , Russia invading Ukraine, the end of Quantitative Easing (easy monetary policy), mid-term elections, Ebola contagion and the collapse of oil (good for consumers, bad for energy companies).
Most experts think the Federal Reserve will start raising rates this year but rate hikes in 2015 will only make the Fed “less loose”, not tight in historical terms. We believe a continued strong dollar and productivity growth, when coupled with a banking system that is maintaining tighter lending standards, signals that inflation should remain subdued.
Looking Ahead into 2015
The famous investor Sir John Templeton pontificated once that “bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria”. We believe the current bull market is “maturing on optimism” and thus still has some room to run. However, this maturing US bull market will come with increasing (more normal) market volatility. It picked up during the last months of 2014 and has continued into January.
US equity valuations are at or close to historical averages. Concerns about global economic growth, the health of select emerging markets, geopolitical tensions along with plunging oil prices seem to have investors on edge but developed and emerging international markets look attractive from a valuation perspective. Europe remains in the doldrums but will hopefully see the benefits of accommodative monetary policy by the European Central Bank.
To conclude, I keep this quote pinned on my desk … “you know your portfolio is properly diversified when there’s always a portion of it you do not like”. We expect that 2015 will reinforce this view.