market perspective february 2015

Market Perspectives - February 2015

Experience Insight Impact

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Overview: After several years of generally benign market volatility, we believe 2015 could see broader market swings. Although in the month of January the S&P traded within a somewhat narrow range, we did experience more volatility with multiple moves both up and down of 3-4%. This month we explore the rationale behind the possibility of increasing volatility and discuss how we will seek to opportunistically take advantage.

January Market Gyrations


What Do We Mean by Volatility?

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• Since 2011, the market has not experienced a pullback of greater than 10% (although we came close in October ‘14). On average, we experience a 10% decline every year.

• Looking at this longer term trend, market declines have seemed minor and quickly erased losses.

• As you will note in the coming slides, we expect markets to normalize with modestly more future volatility.


The Fed’s Exit

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• The Federal Reserve’s rate “manipulation” is coming to a close.

• It is widely anticipated that after more than 6 years of a near zero interest rate target, the Fed will begin raising rates this year (with many expecting them to do so in the summer time frame and at the latest, early in 2016).

• Removing this so-called “Fed Put”, in which the Fed bails out the market with any weakness, logically could cause more volatility.


Large Currency Swings

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• With the U.S. Dollar Index up almost 20% in the last 9 months (moves not typically seen in currency markets), we may see large price moves (both negative and positive) in asset classes affected by currencies.

• Oil, which trades in U.S. Dollars, has already seen such a move.

• We would also expect to see some earnings volatility amongst U.S. multinationals as it becomes more expensive for foreign nations to purchase the goods and services of these companies.


Corporate Earnings & Profit Margins

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• The thin vertical line represents the current quarter’s expectations for S&P 500 sales and earnings growth. The next four quarters are on the right side of the chart, reflecting consensus expectations and the left side shows the last four historical quarters of S&P 500 sales and earnings growth.

• With about half of the S&P 500 companies having reported Q4 2014 earnings, sales growth is slightly negative and earnings growth is a modest 3.5%.

• The energy sector’s rapid decline may throw future S&P 500 earnings growth in to negative territory for the first time in quite a while, with growth expected to pick up later this year.

• With labor markets beginning to firm-up, we also may see some profit margin pressures.

• Swings in earnings may tend to cause market volatility over time.


How Does This Translate to Client Portfolios?

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• Risk management remains one of our foremost objectives for clients. We seek a reduction of volatility by utilizing a variety of different investment strategies. In other words, it is important to be flexible and have some level of “defense on the field.” When appropriate, we can offer additional protection via portfolio hedging.

• Simply stated, our goal is to dramatically reduce downside capture in client portfolios.

• We seek to be opportunistic in adding to asset classes and securities that offer attractive risk/reward opportunities based on this risk management process.

Market Perspectives – February 2015


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Conclusion: Many of the safety nets that have buoyed markets and reduced volatility are advancing towards their latter stages. We believe this may yield more market volatility than in recent experience as well as offer potentially interesting opportunities. As always, with the flexibility to preserve client capital, we are seeking to invest in asset classes and securities with favorable risk/reward outcomes.

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Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources believed to be reliable, but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.


Disclaimer

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market perspective february 2015

Economy & Finance