Dear Clients and Friends,
As of this writing we duly note the following:
Happy New Year!
What a stressful but productive year for the economy and U.S. stock market. There are no shortages of headline events that would “normally” rattle the markets. This is U.S. resiliency at its best. To describe the year 2014 with a pun, my literary description would be that the U.S. economy is acting like—a rebel with a cause, when compared to the rest of the world. The U.S. economy is in recovery mode with quarterly GDP estimates continually being revised upward. While this is a lagging economic indicator, these are steps in the right direction. Other areas signaling positive economic growth are car and truck sales, and for what it’s worth the end of Federal Reserve stimulus via quantitative easing. To move forward in 2015 and beyond, middle-class wage growth and a more confident global consumer will be required to fuel economic growth and to support higher asset prices.
Oil Patch Pain
The precipitous decline in the price of oil was largely unforeseen and I don’t see any “experts” that will be able to successfully call the bottom in this troubling commodity price decline. What I do see is an instant increase of disposable income for consumers. Oil price declines are providing relief at the pump and a jingle in the pocket of consumers. If the price of oil stabilizes in the coming months, it would provide a powerful “shot in the arm” to global growth—a viewpoint that is currently being underestimated. Lower oil prices would provide a market-based, natural economic stimulus rather than the faux-stimulus that the global central banks provide in the form of interest rate cuts in an already low-interest rate environment.
Wide Dispersion of Returns—U.S. Large Cap vs. Global Equities
In reviewing asset class performance, it’s painfully noticeable that global equities (particularly emerging markets) have substantially underperformed the U.S. markets for years now. I offer this empathetic reminder that your portfolio is properly diversified when there’s a portion of it that causes grief or frustration. Rather than focus on the grief in your portfolio, recognize that periods of over- and underperformance are normal when investing in a globally diversified portfolio. Performance will shift when you least expect it. Using the MSCI EAFE Index as a historical gauge, these periods of underperformance last about 5 years—going back to 1970, when the index was introduced. The idea is to have time in an asset class and not to market time (trade frequently) an asset class. We are long-term investors in global stocks.
Benchmark Indexes 5-Year, Average Returns through 2014
S&P 500 Index 14.59
MSCI EAFE 4.29
MSCI World Ex-US 4.16
MSCI Emerging Mkt USD -1.51
FOMO Risk—Fear of Missing Out
A respected investment manager that I follow, Howard Marks of Oaktree Capital Management, describes FOMO risk as “the risk that comes from the excessive fear of missing out” on investment opportunities. This fear is a risk factor because it leads investors to do the following: to take more risk than necessary, to invest in securities they don’t understand, and to chase investment returns (to buy high, rather than to buy low) at inopportune times. I caution folks to be mindful of this as U.S. markets reach multi-year highs. Don’t invest because you feel like you have missed out, invest because there is an ultimate goal to achieve further down the road.
We look forward to visiting with you in 2015. Thank you for your trust and confidence.
Peace and Prosperity,
Matthew D. Peck
Client Advisor & Co-Managing Member
Amicus Financial Advisors, LLC