Last December, Ben Bernanke announced the Federal Reserve Bank would begin winding down their latest and largest round of U.S. Government bond market manipulation, before 2014’s year-end. This created considerable nervousness for investors as American stock market performance had clearly become dependent on the controversial policy. As we highlighted in previous posts, our central bank was effectively pulling the punch bowl away from the party. On cue, stocks retreated in January, then rallied back to even by March, trended higher into late summer, erased their gains completely by mid-October and were briefly under water for the year, then rose again to new highs in early December. Currently we are experiencing another period of volatility, precipitated by the steep decline in oil and gas prices. Gold is finishing the year mostly flat, while interest rates have moved significantly lower. The 10 year U.S. Treasury bond began the year yielding over 3% and is now hovering around 2.21%. Interest rates have been driven lower as capital moved out of stocks and into the safety of bonds with the stock market volatility described above. This was contrary to the expectations of most investors anticipating interest rates to rise in 2014.
Energy prices are plunging, primarily because the world’s supply of oil has exceeded demand. This has been the direct result of the U.S.A.’s definitive march toward energy independence. American oil production has almost doubled in recent years and that larger supply, combined with a slowing global economy, is driving down prices. Last spring the U.S. became the largest producer of oil and gas in the world, surpassing Saudi Arabia. Although lower energy prices are not favorable for oil industry profits, the savings at the gas pump (at prices we have not seen since 2010) along with less expensive winter home heating costs, make more money available for the average American consumer to spend. Our slow-growing U.S. economy looks relatively good when compared to Europe, which is teetering on the brink of another recession, and China whose rate of growth is slowing. Despite China’s slower growth rate, the International Monetary Fund announced last month the Chinese have now overtaken the U.S. as the world’s largest economy, in overall size. On an economic output per capita measurement, China is still only a tenth of the American economy, due to the significant size differences in our populations.
Looking forward into 2015, Pacific Wealth Management expects the higher level of volatility we experienced in 2014 to continue. Most economists expect the U.S. to grow at a slightly faster pace next year and Wall Street is forecasting the Federal Reserve will begin raising interest rates by mid-year. The financial markets are likely to become more nervous when our central bank president, Janet Yellen, formally ends monetary easing and begins increasing those short-term rates. Meanwhile, with the global economy slowing, the European Central Bank and Bank of Japan are heading toward more financial market manipulation, a-k-a, easing. As Putin is likely to continue his antics in Ukraine/Russia, along with a boiling Middle East, geopolitical tensions could increase and rattle global demand, slowing down economic growth everywhere.
Our conservative, well diversified, investment strategy is prudent during these unprecedented times. We remain focused on preserving our client’s wealth. Please feel free to contact us if you have any questions regarding the financial news events of the day.
With the holidays upon us, and 2014 quickly winding to a close, we hope you and your families are healthy, happy and planning some time with one another over the next few weeks. Best wishes for an enjoyable holiday season and productive 2015.
Mark, Jim, Justin and Justin
Pacific Wealth Management