Last week: Friday’s jobs report was certainly bullish, as December’s 252,000 increase in nonfarm payroll employment did indeed make 2014 the strongest year for job growth in 15 years (WSJ). Wage gains for the year were more modest (1.7%), but when combined with the positive impact of lower oil prices on consumer spending the results support the consensus 2.5%-3% GDP growth in the US for 2015. That seems to be reflected in rising consumer confidence numbers.
But plunging oil prices are adding to global worries, as the implications of such a large decline (over 50%) in such a short period of time (6 months) are not certain. Other concerns include weakening Chinese growth expectations and resurgent Eurozone growth and debt issues (Cornerstone Macro).
American Economic Association Annual Meeting notes: I attend this conference every year (this year’s was in Boston), and out of many pages of notes here’s what I would most want to convey: (1) Most expect US growth to be stronger in 2015 than 2014, (2) an apt description of the world today is “reliance on monetary policy with fiscal policy paralysis,” (3) A key problem in the US and elsewhere has been “short-term actions to support the long-run, when the solution is long-run actions to support the short-run.” That’s a clever way of saying that “policy churning” has created a lot of uncertainty and fence-sitting, and (4) for Europe, the phrase “kicking the can down the road” has been replaced with “pretend and extend.”
Outlook: This week we begin our annual series of client updates in Houston and San Antonio. These will include outlooks from Jeanie Wyatt, CFA, our founder and CEO & CIO (Chief Investment Officer), Christian Ledoux, CFA, Director of Research, Leah Bennett, CFA, CIC- Co-CIO, and Hutch Bryan, CFA, Director of Fixed Income. Here are a few of the points I will be making:
Since the 2007-09 financial crisis, analysts have consistently under-predicted the stock market and over-predicted economic growth.
That’s because the primary policy response has been primarily monetary policy, which reduced the odds of financial collapse and led to an increase in the value of risk assets. But it did little for growth, which requires fiscal policy (tax, spending, regulatory reform) as well.
Europe has been the most reluctant to deploy extraordinary monetary measures, a situation that should change in 2015. That’s the case for European equities.
In the US, equity valuations are at the higher range of normal, leading to expectations of mid-single digit returns.
Pullbacks and corrections are caused by shocks, and we are in the middle of a big one – the plunge in oil prices.
The net effect of a supply-driven decline in oil prices should be positive, as net oil importers outweigh net oil exporters by a wide (4X+) margin.
But potential negatives are 2: Geopolitical risks as OPEC country revenues fall by half; uncertain global financial linkages tied to the price of oil.
What we are really talking about is uncertainty, and the way to deal with that is through the tried and true tools of diversification within asset classes and asset allocation among asset classes, particularly stocks and bonds.
A key insight this year has been that sector diversification and sector constraints worked to produce strong risk-adjusted returns.
As always asset allocation continues to be important; there is no “new investing.”
Posted on Thu, January 15, 2015
by Josie Coiner