As this year winds to a close, I would like to thank you for your business and wish you a happy holiday season. I would also like to reflect on the financial markets for the last few years and pontificate on the possibilities for 2015.
My first thought is that the bull market of the past several years will continue into next year. There have been modest short-term corrections but each year has been profitable. Many are curious as to why the returns fluctuate greatly between years. I will attempt to compare the last two years and reflect on next year.
2013 was wonderful. Several of our positions gained more than 40% last year.
2014 was challenging because some of our winners became laggards. There was no logical explanation for this reversal, so we gradually reduced some positions and sold others. Unlike last year, there were gains in large stocks and declines in small stocks. Cheers to the home team because the domestic economy and stock market was the leading performer and the U.S. dollar was the leading currency. Next, the success of active management with individual stock selection last year changed this year when owning the index was the way to go. Lastly, ownership of foreign stocks created a drag on total performance in 2014.
Next year is still uncertain but we are very optimistic. We reviewed our global asset allocation and reduced our foreign holdings. We would never limit our investments solely to U.S. stocks because that could easily lead to a reversal of fortune when foreign stocks recover. In fact, since prices are much lower in Europe and other countries today, long-term investors recognize the value of buying low now and waiting for a recovery. Keep in mind, if we solely load up on today’s winners, all holdings will decline in tandem when fortunes change – and, they always change. Each year is different, with new opportunities and pitfalls.
Uncertainty is what makes my job so exciting and challenging. This is the time to gaze into the future and ponder the potential opportunities and obstacles. I believe that the positives greatly outweigh the negatives. I believe that the growth momentum for the U.S. economy will continue. The Federal Reserve this week signaled it would take its time in raising interest rates, which caused a two-day market rally on December 17 and 18. The Wall Street Journal on December 19 reported that this was the Dow’s biggest gain since November 2008. Also, the one-day gain of 421.28 on December 18 was the biggest in the last five years.
Other positive factors include strong retail sales and employment gains as evidence of improving economic growth. Low inflation and declining oil prices have been positive for business and consumers alike. However, based on the history of past declines caused by lower oil prices, it will likely be short-lived, followed by a nice opportunity to buy energy stocks at lower prices. The big losers are Mr. Putin and the Russian economy.
For those who enjoy some whimsy, equities often benefit in the third year of the presidential term. The S&P 500 index has averaged a 16.5% annual return since 1950 during those third years, according to Strategas Research. This may be the time to increase our allocations to equities.
Emerging markets have endured their challenges recently; but since they are the lowest cost producers because of their low wages, we may increase our allocations as their economies recover because we believe their potential to outperform the developed markets is undeniable.
On balance, we are very positive about the prospects for next year.
We are very excited about the current state of Kaye Capital and our plans for next year. Our team is highly qualified, focused on excellent performance and client service and collegiality in working together. We invested to upgrade our technology for efficiency, as well as improved security and service. Current discussions will hopefully result in meaningful changes to implement our vision to become an elite investment and financial planning firm.
The office will be closed for the year starting the afternoon of December 24th.
On behalf of Ken, Kelly, and Jessica, we wish you and your families a fabulous holiday season and New Year. We wish you good health, love, and joy in the upcoming year.