One of the more interesting events during this year’s first quarter had little to do with the economy or the stock market, but rather basketball. The Oracle of Omaha, Warren Buffett, offered an astonishing $1 billion prize to anyone of fifteen million people who could successfully predict the winner of all 63 games in the NCAA men’s basketball tournament. With odds of winning estimated at 1 in 9 quintillion it came as no surprise that the only winner was Mr. Buffett who received priceless publicity.
There was plenty of drama away from the basketball courts, especially overseas where international markets remained under pressure due to concerns about slowing economies and mounting tensions in the Ukraine. Developed international equity markets (MSCI EAFE) gained a modest 0.66% and the more volatile emerging markets (MSCI Emerging Markets) continued losing ground, down –0.43% during the quarter. Over the past twelve months those markets have returned 17.54% & -1.21% respectively.
Back home, the outlook was brighter as nonfarm payrolls increased by 192,000 in March and the unemployment rate held steady at 6.7%. March also produced a milestone in our employment situation. Last month, private-sector payrolls hit a record 116.09 million, surpassing the peak set in January 2008. This means we have finally recovered all the private-sector jobs lost during the great recession. Unfortunately, it’s been the longest jobs recovery on record and we are about 7.2 million jobs below the number needed to keep pace with the growth in population during the recession and subsequent recovery period. Still, it’s a start and we have finally moved from jobs recovery phase into jobs expansion phase.
The S&P 500 rose a respectable 1.81% during the first quarter. Mid-sized companies (S&P 400) led the pack with gains of 3.04% while last year’s winner, small companies (S&P 600), brought up the rear, returning 1.13%. Over the past twelve months, domestic equities brought home the bacon with gains ranging from 21.24% (S&P 400) to 27.81% (S&P 600).
Our economy grew at a better than expected annualized rate of 2.6% during the fourth quarter. This was below the 4.1% rate registered in Q3. The slower growth was due to reductions in government spending, business inventories and residential fixed investment. Those reductions were partially offset by a healthy increase in consumer spending which rose at the fastest pace in three years. Since consumer spending comprises 70% of the economy, it matters greatly what people are doing with their pay checks, how big those checks are and how many hours they work. For the full year 2013, our economy grew 1.9% compared to 2.8% in 2012. Severe winter weather is expected to translate into modest 1Q-14 GDP growth (not yet released), currently estimated at 1.5% to 2.0% annualized.
The Federal Reserve has now trimmed its QE (quantitative easing) bond buying at each of its past three meetings and all signs point to further tapering. With inflation running below the Fed’s target range, and unless there is a significant slowdown, most economists expect the Federal Reserve to raise interest rates in 2015. Because interest rates remain near record lows, we are holding firm to our short-term laddered bond strategy. We are more than willing to forgo modestly higher yields in exchange for capital preservation and the avoidance of interest rate risk. Our bond benchmark, the Barclays Capital 1-5 Year Gov’t/Credit, returned a ho-hum 0.40% during the first quarter.
What’s Next?
Keep an eye on Russia, earnings, interest rates and inflation. We are now five years into a post-recession economic expansion and the corresponding recovery in earnings is naturally reflected in stock prices. It’s no accident the market is up 174% from its March, 2008 low – just look at earnings. The S&P 500 index posted earnings of $107.30 in 2013, up 170% from the 12 month low reached in September, 2009. Estimated earnings for 2014 and 2015 are $120 and $137 respectively. At P/E ratios of 15-17 times earnings, the market has plenty of room to grow over the next couple of years. Of course, given recent record advances, it would not be unexpected to go through a consolidation phase. If that happens it would be an opportunity for investors to purchase shares of great companies before the next up cycle.
So much money is needlessly wasted every year by investors chasing relative performance in a never-ending game of “Let’s Beat the Market!” On a risk-adjusted basis, the vast majority of investors cannot beat a properly diversified low-cost, tax-efficient index consistently, over time. Yet the allure of trying to beat the market is so compelling, many investors simply can’t resist the temptation to try. They continue to pay active management fees that dwarf index fund fees, believing their advisors know something the entire universe of experienced, highly educated analysts and asset managers don’t know, and that unique intellectual capital can be exploited to a permanent performance advantage. We believe it simply can’t be done, nor is it a worthwhile pursuit. It’s not unlike Warren Buffet’s wager, but that bet didn’t cost those playing anything. Unfortunately, when it comes to money invested in active management strategies, the dollars at risk are real and the consequences can be devastating.
Instead of defining success by performance relative to an index, we believe it is better to measure success by the probability of attaining your various life-goals without unnecessary risk and at reasonable costs. This requires a change in the conversation from short-term “relative performance” to a discussion about goals, the resources available to fund those goals and the risks incurred along the way. Rather than waiting for next year’s billion dollar bracket (if there is one), a more appropriate strategy might be to commit your goals to writing, prioritize them and then develop a realistic plan which can be updated as often as needed.
Whether your goals are wealth accumulation, utilization, preservation or transfer, a well-developed plan to which you can hold yourself accountable is an invaluable aid in effective wealth management. The professionals at Wealthview Capital understand this, are committed to our clients’ success and stand ready to help in any way we can. With a well-developed plan funded by a low-cost, diversified investment strategy, and in partnership with dedicated professionals, your odds of success might be more realistic than relying on Mr. Buffett’s March Madness wager.