January 7, 2015 – 4Q2014 Market Review Newsletter

January 7, 2015 – 4Q2014 Market Review Newsletter

I hope you had a safe and pleasant holiday season. Again the markets were kind to us. The S&P 500 index hit 53 all-time high closes during the year. For the year the broad U.S. Market index was up 12.85%, the DOW up 10.04%, the S&P 500 up 13.69%. However, the Russell 2000, which is a broader index, was up but only 4.89%. This shows the distortions that can be made when you read articles and listen to people talk about their returns. What I find so interesting is how the popular press rush to show how much money flowed into the S&P index and that most money managers underperformed. The lessons learned from 1968, 1983, 2003 to mention a few, being forgotten. The index from those years had long ten year periods of zero or little return. This last year’s returns were virtually all from the “large value” companies which produced a whopping 17.12% return. If you had money in the usually faster growing small companies you were up, but only 2.46% (as shown by the Russell 2000 Index) and if you were diversified overseas you actually were flat or down on that portion of your portfolio. Most money managers think long-term and usually include the smaller companies. To limit your investments to just the U.S. Market would not be a good strategy. We will continue to think long-term and have portfolio’s that are diversified. We acknowledge that we may miss some of the upswings but with some luck will also miss more of the dead and down years. Remember a 50% loss requires a 100% return to break even.

There are several things we will be watching for this year. I believe that a lot of the run-up in the “Large Caps” can be attributed to the massive buildup of the Federal Balance sheet and our easy money policies. With the recently passed TRILLION dollar budget and total debt of over 17 TRILLION I am reminded of a quote:

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must learn to work instead of living on public assistance.” Cicero 55, B.C.

Interest rates will rise as the economy gets better and how that will affect our federal balance sheet and the markets is any ones guess. As interest rates rise, both the stock and bond markets will be affected. Oil will be another item to watch. We are all receiving the benefits of lower oil prices (down 50% since mid-year), and the stimulating effect on the economy, however if the price per barrel drops into the low $40.s or even to high $30 the effect could be reversed. I believe we will see the DOW hit 20,000 in the next few years.

Willis Ashby, CFP®

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