The market engaged in an almost comical tug of war between bulls and bears during the first quarter of this year as it remained obsessed with Federal Reserve monetary policy. Investors anticipated and responded to Janet Yellen and her FOMC (Federal Open Market Committee) colleagues’ every nuance indicating their likely intentions to raise interest rates. In January the S&P 500 looked like a pin ball as it bounced back and forth three times between a high of 2,062 and a low of 1,992 before finally breaking out to the upside in early February with an impressive rally to a new all-time closing record of 2,117 on March 2. From that point investors dropped quarters back into the pin ball machine, buying and selling based on their opinions of whether a hawk or a dove would fly from the next FOMC meeting.
It reminds me of the childhood ditty we used to chant while pulling petals off a daisy - “She loves me, she loves me not.” Janet showers love on equity investors when she opines the economy is too fragile for a rate increase and then in the next FOMC meeting she withdraws her affection and the word “patient” from the Fed’s policy statement. Investors believe weak economic news will force the Fed to maintain the status quo zero rate policy which leads to market rallies. Strong economic reports have been leading to the opposite opinion and sell-offs. The market’s reaction is a classic case of the sometimes counter-intuitive “good news is bad news” scenario. What will it be next time? Who really knows? The answer is obvious - no one knows.
In spite of FOMC-induced gyrations, the first quarter of 2015 proved to be profitable across the board. Medium-sized U.S. companies (S&P 400) experienced the most love, up 5.31% during the period, followed closely by developed international markets (MSCI EAFE) +4.88%, whereas the largest companies (S&P 500) saw the smallest gains, up only 0.95%. Many of the companies in the S&P 500 are multinationals and derive a large portion of their revenue from international markets, so a strong dollar hurts their exports. With inflation almost non-existent, interest rates continued a downward drift. The yield on the 10-year U.S. Treasury note dropped below 2% and intermediate bonds (Barclays Capital 1-5 Year Government/Credit) returned a respectable 0.96% over the year’s first three months.
Back to the Fed
The Federal Reserve is trying to delicately balance its dual mandate of maximum sustainable employment and low inflation; not an easy thing to do. If the Fed raises interest rates too soon and too fast it could choke off our still fragile economic recovery leading to a recession. If they leave rates too low for too long it could cause hyper-inflation or even a bubble in the stock market which would inevitably be followed by a crash, something none of us would like to experience (again).
The myriad of factors influencing the Fed’s crystal ball are constantly changing and almost impossible to predict. Consider the price of oil as one example. Few could have predicted the pace and extent of the decline in oil from over $100 per barrel last June to a low in March of $43. Prices have bounced off their lows but some experts think oil can go to $25 based on an analysis of the storage capacity situation developing in Cushing, OK. The contraction in the oil patch obviously hurts energy sector companies as evidenced by the announcement of over 100,000 layoffs in the past 5 months. On the positive side, low oil and gas prices benefits the broad economy by increasing funds consumers have in their wallets after filling up their gas tanks. They can then spend that money on other goods and services.
The price of oil, the value of the dollar and interest rates are all interconnected. Can you imagine trying to determine Federal Reserve monetary policy given these and dozens of other interconnected and constantly changing influences? Even harder might be trying to construct an investment portfolio believing you know the future direction of these macro-economic fundamentals. Such a pursuit is risky at best and dangerous at worse. You might be lucky a time or two but when your luck runs out so does your money.
Avoid Petal Picking
History demonstrates that every action has an equal and opposite reaction. One thing leads to another, which then leads to unintended consequences that no one considered. Just at the point some investors are giving up on foreign stocks, a strong dollar is causing a rally in international markets because it helps those countries’ exports and low oil prices aid oil importing countries like Japan. Rather than betting on oil, the dollar or interest rates, we believe investors would be better served with broadly diversified, low-cost, tax-efficient portfolios that are re- balanced periodically. Portfolio re-balancing is a risk-reduction tool and a form of contrarian investing in which we trim positions that are potentially over-valued, redeploying those dollars into other out of favor assets.
What good is a well-managed portfolio if you are still unable to achieve your life’s goals? Do you know if you are on track? Are you saving enough? Are you taking more risk than necessary? If retired, are you compromising your lifestyle unnecessarily because you haven’t adequately assessed the resources you will need? Will you be able to leave a legacy to your heirs? It doesn’t matter if you are just beginning your investment journey or if you have already climbed your financial mountain. We believe one of the keys to success is defining and prioritizing your goals and periodically checking your progress to ensure those goals are still attainable. Helping people answer these questions is one of the most gratifying parts of our jobs at Wealthview Capital, and we consider it a high honor. After all, a sound, goals-based plan funded by a low- cost, prudently managed investment strategy makes more sense to me than plucking petals from a daisy.
To those who have partnered with us in the management and planning of your financial resources, we remain grateful for your business, trust and confidence.