“We’ve Come So Far…and the Future Looks Bright”

- 2014 4th Quarter

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Happy New Year!

Before we take a look towards the future, let’s reflect on where we have been.  Noting how far we’ve come in recent years should put to rest any anxiety felt over the first week of 2015. It’s been almost six years since we experienced the “Great Recession.” 

2Q, 2015 will mark six years since the beginning of the rebound, or the bull market, we are now in today. In 2Q, 2009 the Dow Jones gained 11.9%, the S&P 500 Index ended at 15.9%, and the NASDAQ Composite Index finished up 20.3% kicking off what would be a period of growth for both stocks and bonds. Before 2Qtr, 09 the S&P 500 had posted six negative quarters of performance in a row. 

Since 2Q, 2009 the S&P 500 Index posted an annualized 21.2 percent return; the MSCI EAFE Index has posted an annualized 16.6% return and the BC Aggregate Bond Index annualized a 4.8% return.  This period also saw an unparalleled easy monetary policy.2

As we popped the champagne and began 2014, experts were expecting stocks to produce high single digit returns, 7% percent corporate earnings growth, and a 2% dividend yield with p/e ratios remaining constant. The S&P 500 exceeded expectations gaining 13.7% with a small valuation increase. The Dow was up 10% while the unpredictable NASDAQ gained 14.7%.  International stocks once again underperformed as slower economic and profit growth in those markets generated flat to slightly negative results.

As for bonds, we expected earning in the low single digits. And we were right. With that said, certain sectors did produce unexpectedly strong returns. While the short-term interest rates locked in near zero and yields on 7, 10 and 30 yr. bonds declined the 20+ Treasury Index saw generous returns of 25.1%.  In 2015 we can expect long U.S. Treasury yields to continue their decline.  Short terms rates are expected to stay low for the first half of 2015 with a possible growth in the second half of the year. Experts predict a 2 – 4% fair bond return for 2015.


Economic and Market Outlook for 2015.  The Federal Reserve has completed its final round of Quantitative Easing (QE). With the Fed no longer participating as a buyer of debt securities, experts believe interest rates will begin to seek out more even levels. Based on current inflation outlooks, this may be very close to current levels, at least on the longer end of the interest rate curve. In fact, during the past several months, we have seen yields on shorter maturities rise while maturities of 10 years and longer have continued to decline. As for most of the past six years, capital markets have been driven by the actions of central banks which should continue into 2015.


Oil & Energy. The price of oil was cut nearly in half between June and December, registering lows not seen since 20093. The effect of these lower prices:  more disposable income in the hands of consumers and businesses contributing to an already low inflation. While falling oil prices are a plus for consumers and businesses that consume oil, it’s a negative for manufacturing companies as well as the newly formed fracking-based industry. With OPEC refusing to reduce production, oil prices should remain low through 2015 and beyond. Oil prices stabilizing has the potential to add just less than .5% to U.S. GDP growth in 2015.


Unemployment. Unemployment continued to fall during 2014 suggesting that the economy is approaching full employment.  The unemployment rate fell from 6.6% in January to 5.8% in November.  Such unemployment reduction usually leads to salary growth which has been stagnant since the beginning of the recession. Wage growth has the potential to accelerate from an average of 2% to 3.5% as we approach full employment, a situation where nearly every American who is willing and able to work is able to secure a job by 2016. Growth in wages will cast a positive light on consumer spending.


Interest rates.   All eyes are on the Fed as economists expect a rate increase in the middle of the year, with the potential for additional hikes by the end of the year. In a mid-December statement, Fed policymakers said they "can be patient" when it comes to timing a rate increase, but most economists see their 'patience' running out by midyear leading to a slow, steady hike in interest rates to more normal levels.  That being said, the Fed is cautious in terms of doing as much as possible to ensure that economic growth is sustainable before increasing rates. And even if rates do increase, they are still quite low by historical standards.  When it comes to the strategy of holding down rates to stimulate growth experts believe “the Fed's work is now done."4


Housing. 2014 was a disappointing year for the housing market. Housing starts rose less than expected, due to a lack of first-time homebuyers and weak formation of households. Tight credit and rising levels of student debt were responsible for keeping many potential first-time home buyers on the sidelines. Existing-home sales have done considerably better than new-home sales, recovering about 80% of the pre-recession highs, while new-home sales recaptured only 37% of their previous peak.   With that said, real estate professionals do believe that the housing market will pick up in 2015 and beyond. Higher wages, improved labor market conditions, skyrocketing rents, and improving long-term demographics all provide a boost to the market. 


Inflation. Inflation continues to weigh in at the lower end of expectations, and that trend will continue, and even accelerate, if the prices of oil and other commodities fall or even stabilize at recent lows. Even though the economy has been heating up, the price of energy has been cooling. Oil's aforementioned plunge has driven down prices for gasoline, home heating oil, jet fuel and more.  The Fed takes inflation and inflation projections into account when determining the direction of future rates and is wary of inflation falling below its target of 2%5.   Based on that, the Fed Reserve has sharply cut its forecast, saying that inflation will run between 1 percent and 1.6 percent in 2015. That's down from a September, 2014 forecast of 1.6 percent to 1.9 percent.


Rising dollar.   Supported by discontinued quantitative easing and an improving economy in the U.S., not to mention loose monetary policy in developed economies overseas, the dollar is expected to continue to rise in 2015.  Through December, the U.S. Dollar Index was trading at its highest level since 2009. A stronger dollar is likely to contribute to other trends expected to occur in 2015, including weaker commodity prices, lower inflation and increased consumer spending.6



Emerging markets.  On the downside, falling oil and commodity prices as well as the potential for rising rates and an even stronger dollar are wreaking havoc in emerging markets. It’s been a disappointing year for emerging markets, which is down more than 5%. What comes next could be worse in a number of countries depending on the course of oil prices in 2015. In December, the Russian ruble experienced its largest one-day decline, sparking a sense of economic chaos. Emerging market countries frequently borrow money denominated in foreign currency (usually in U.S. dollars), and so a stronger dollar leads to more expensive interest payments and lower economic growth.7 Lower growth in emerging markets and the potential for geopolitical turmoil has the potential to negatively impact the U.S.


So now that you know where we’ve been and where we’re headed, how should you prepare your investments for 2015? Ignore the market turmoil and prognostications and focus instead on creating a long-term investing strategy that will see you through 2015 and beyond. The New Year is a great time to do a risk tolerance `re-check’.  Are your investment goals still the same? What about your attitude towards short-term performance of your investments – has that changed since your initial set-up.  Once that is complete, determine if your asset allocation mix is still appropriate, or determine if your risk tolerance has changed.  Lastly, review your investments. Are you invested the way you desire to be invested? Do you want to make any changes?  If you wish to do a “check-up” of your account to ensure it is satisfying your goals and objectives, and/or that you are contributing enough to achieve your desired retirement, please do not hesitate to contact us.  On behalf of everyone at Pension Advisors, I would like to wish everyone a very Happy and Healthy 2015.


All the Best,

David A. Krasnow, President



[1] Urban Meyer, The Ohio State University – National Champion - Football Coach
[2] Congressional Research Service, July 2014
[3] Reuters with CNBC, Friday, 12 Dec 2014
[4] Bernard Baumohl, chief global economist with The Economic Outlook Group
[5] Fed Watch: Wage Growth - or Lack of - Continues to Surprise, Tim Duy, Economist’s View
[6] Economics Group 2015 Economic Outlook : A Whole New Ball Game, James DunBron
[7] “Outlook for ‘Big Ticket’ Spending in the Eurozone” (2014)

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

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