December 2014 Financial Markets Summary
The most important global macro trend is the recent decline in the price of oil, from $113 per barrel to today’s $66 per barrel. While Americans have seen a large drop in the price of gasoline, by far the biggest impact is on global economies. The U.S. has benefitted from lower oil prices, as have many industrialized nations. At the same time, lower prices have crippled the economies of Russia, Venezuela, Iran, and Algeria, to name a few. Even though the U.S. is now the world’s largest oil producer, our economy is widely diversified and therefore not reliant on high energy prices. Domestic oil and exploration companies have struggled this year in the face of falling oil prices, with four of the six worst-performing companies in the S&P 500 now in the energy sector. There is nothing on the horizon to suggest the trend will end anytime soon.
This positive news for the U.S. economy puts the Federal Reserve Board in a quandary. Official employment numbers are near what has historically been considered full employment (although we would argue that part-time does not equate to full employment). Core inflation has remained low, now at only 1.8%. But interest rates remain at historic lows, with no indication the Fed will push them higher anytime soon. Best guesses are third quarter of 2015 for the Fed Funds rate to move perhaps a quarter-percent higher. Is it possible the Fed is wrong and will be late to bump rates higher? As J.P. Morgan’s David Kelly notes, “There is no soft landing if you are a mile from the airport and still at 30,000 feet.”
Commodities, energy and natural resource stocks were hammered in November, mostly because of the 40% drop in oil prices. But they were not alone, with precious metals also losing ground. In fact, large domestic stocks were really the only bright spots during the last three months. A look at 10-year average returns provides a much different picture, but given the state of oil prices and a currently strong U.S. dollar, it is unclear what the future might bring. Although market fundamentals remain fairly positive, the markets are overdue for a correction. We are going on three years since the last 10%-or-greater re-set. Studies tell us that investors whose sole goal is to beat the markets are among the first to bail when those markets head south.
We still believe investors will be best served by focusing on what returns they need, rather than on the returns they might want. Well-diversified portfolios will no doubt under-perform the Dow when only that part of the market is strong. But boring bonds could save the bacon when times get tough. Remember that today’s headlines and tomorrow’s reality are seldom the same. We continue to suggest that you protect the money you might need to take from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds, despite their still-unattractive yields. The rest of your portfolio should be invested in a truly diversified mix that meets your risk tolerance and long-term, realistic goals.
|Asset Index Category||Three Month||2014 YTD||2013||10-Year|
|S&P 500 Index – Large Companies||3.2%||11.8%||29.6%||5.8%|
|Dow Jones Industrials – Large Cos||4.2%||7.5%||26.4%||5.5%|
|S&P 400 Index – Mid-Size Companies||0.3%||7.4%||31.5%||8.5%|
|Russell 2000 Index – Small Companies||-0.1%||0.8%||37.0%||6.3%|
|MSCI EAFE Index – Developed Intl||-4.4%||-3.9%||19.4%||2.4%|
|MSCI EM Index – Emerging Markets||-7.6%||0.2%||-4.9%||6.8%|
|S&P Global Natural Resources Index||-12.2%||-6.9%||1.5%||6.4%|
|London Fix Gold Price Index||-8.0%||-1.8%||-27.3%||10.1%|
|Inflation-Protected Bond Index||-1.9%||3.1%||-2.2%||4.0%|
|Emerging Market Bond Index||-3.0%||3.4%||-7.2%||7.4%|
|Long-Short Equity Index||-0.5%||2.9%||14.6%||5.4%|
|U.S. Commodities Index||-10.7%||-6.6%||-27.7%||8.9%|
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only. Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy. It is provided with the understanding that no fiduciary relationship exists because of this report. Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice. PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice. If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives. All rights reserved.