By Kelly Compton, Chief Investment Officer of WCM Wealth Management
Year to date the market is up 13.69% as measured by the S&P 500 and the bond market is up just over 5.76% as measured by the Barclays Global Aggregate Bond Index.
Everyone is cheering falling gas prices and predicting this will finally cause the economy to jump to 3% GDP growth or even more. However, slowing international markets, a still-slow housing market, a less robust gain in auto sales, and rising interest rates will all weigh on activity in 2015.
Unfortunately, falling oil prices are no longer a one-way street to nirvana in the United States. Falling oil prices will hurt oil industry workers and states dependent on oil revenue. Texas has been one of the stronger economies in this recovery, and it feels like it is just about to get hit. Falling oil prices will also hurt companies producing goods that are used to drill for oil, potentially hurting the heretofore booming manufacturing sector.
Don’t get me wrong. My outlook is still positive, and there are a lot of things going right for the economy, but it isn’t a one-sided blowout for growth. The positives include an improving wage and employment outlook, the aforementioned $50 billion-$75 billion boost from falling gasoline prices, and a slightly better government spending situation. On top of that, inflation is likely to remain in check, and the U.S. budget deficit worries seem to be abating, at least if the politicians don’t blow it.
Housing was one of the big disappointments of 2014 with essentially no growth in either existing-home sales and modest growth in housing starts compared with 2013. I had been warning since late 2013 that perhaps the most important indicator of a healthy economy may be housing, but I didn’t imagine that existing-home sales would register a full-year-to-full-year decline and that housing starts would grow less than 10% (potentially missing the 1 million-unit benchmark that seemed like a cakewalk at the beginning of 2014. If you recall, the 1 million-unit mark is at the lower end of what I deem a healthy range of 1mm – 1.2mm.
How have folks been reacting to all the headlines? Well perhaps we can glean some useful information by looking at how investors are voting with their dollars. Investors continue to rotate toward defensive sectors such as consumer staples, health care, and utilities, helped in part by the steady decline in long-term interest rates. More cyclical sectors such as basic materials, industrials, and technology are falling out of favor. Typically we see this type of action late in an economic recovery cycle. If the trend holds true, the next sector to see inflows from investor money is the telecom sector.
A bit about China. The basic materials sector has been down over the past three months as investors show concerns about slowing economic growth in China. It’s hard to overstate the importance of China to global commodities demand. For example, China accounts for about half of global steel demand and two thirds of the seaborne iron ore market. China’s steel consumption has probably peaked and is set for a steady decline over the next several years as the Chinese economy rebalances toward consumption instead of investment spending. Iron ore prices fell by half in 2014, and other commodities such as copper are probably not far behind. Given this macroeconomic uncertainty, investors should tread carefully when thinking about commodities and emerging markets.
Just for fun. I recently visited a government web site just to see what the most common New Year’s resolutions are, here they are: lose weight, volunteer to help others, quit smoking, get a better education, get a better job, save money, get fit, eat healthy, manage stress, manage debt, take a trip, reduce/reuse/recycle, drink less alcohol. I was curious to see how people fair with their resolutions. So, I did some reading on the TIME Inc., web site and without too much trouble found a list of the most commonly broken New Year’s resolutions. You guessed it, much the same list. Here it is: lose weight & get fit, quit smoking, learn something new, eat healthier & diet, get out debt/save money, travel to new places, spend more time with family, be less stressed, volunteer, drink less alcohol.
A few short clicks later I found some recommendations that may help folks manage their resolutions better. Instead of a resolution of losing weight, change that to “I’ll walk 15,000 steps per day”. This will require you to put some skin in the game and purchase a Fitbit or some device like it that will count your steps. Instead of a resolution of getting out debt or saving more, change that to “I’ll pay an extra $50 on that credit card every month” or “I’ll put $50 into that IRA every month”. Instead of a resolution of “I’ll drink less” change that to “I won’t purchase any alcohol for the home and I won’t drink alcohol Monday through Friday”. These suggestions have one thing in common, they are more specific and include specific steps that are measurable to help you stick to that New Year’s resolution.
May everyone have a happy, prosperous, and blessed 2015!