An Economy on the Mend

Looking at the Past Quarter

A great deal of market volatility was introduced during the fourth quarter of 2014. A drop in the S&P 500, which began on September 19th, continued a downward spiral that culminated with the average bottoming at 1862 on October 16^th. At that point, the average was negative for the year. The S&P then proceeded to rise and fall in swings of 100 points or more until the end of the year. It is interesting to see how the index fell so sharply, then recovered and fell again. By the end of the year, with the average having moved from1972.3 on September 30th to 2058.9 on December 31st, there was a gain of 4.39% for the quarter and a gain of 9.87% for the year.

When I see these types of swings occur, I think of Rip Van Winkle and imagine falling asleep at the beginning of the year, then waking up at year-end and thinking, “this was a nice steady gain in the markets.” As we know, having experienced the year, this was a tortuous market filled with volatility. We must remember that this is how the market usually works. This very reason, recurring volatility, requires that long term investors be patient and not embrace short-term market changes.

I would like to be able to say that 2015 will be a nice smooth ride in the stock and bond markets. This, however, is highly unlikely. We will probably see what we experienced in 2014.

Lisa Dugan Promoted

The Board of Directors of Secure Planning is pleased to announce the promotion of Lisa Dugan to Senior Vice President, Treasurer and Chief Operations Officer of the company. Ms. Dugan has been with Secure Planning since 1998. During that time she has held various positions as an officer of the firm. In her new position, she will be responsible for overseeing the operation of the company and supervising all aspects of the business. She will also do advanced work with the company President, Ed Mallon, on communications with clients and development of asset allocation strategies.

Ms. Dugan holds a variety of security licenses. In addition to her responsibilities as an officer of the company, she is a Certified Financial Planner working with individuals and families. She is a graduate of the University of New Hampshire. Ms. Dugan is active in the Northern New England Financial Planning Association, and is a member of the US Tennis Association, Bikram Yoga Portsmouth and Seacoast Sports Clubs. She attends both Corpus Christi Parish and St. Theresa’s on the Seacoast. She is an avid Boston and UNH sports fan and enjoys attending games with her husband, Vito.

FED Concerns

One of the major factors in the strength of the U.S. stock market has been the consistency of the Federal Reserve Board (FED) in maintaining liquidity in the economy for the past six years. This has helped keep interest rates low, an advantage to homebuyers and corporations financing with debt. It has lead to an increase in the number of new jobs in the U.S. and a decrease in the unemployment rate. As the U.S. economy grew stronger, it seemed likely that the FED would begin the process of raising interest rates. This would tend to dampen the growth of the economy and control any possible increase in inflation. It would also mean less corporate growth and lower expectations for the stock market.

The GDP growth in the third quarter of 2014 was an amazing 5%! A developed country like the U.S does not generally experience this type of growth. It seemed clear, because of the accelerated growth rate, reduction in unemployment and job growth that the FED would be increasing interest rates by mid-2015. Many stories about the economy include a “but” factor and in this case it is Europe. Europe is seeing slow- to no growth. For December, reports indicated that Europe experienced deflation, or negative growth. This is of real concern to the FED.

If deflation were to continue in Europe it could have a harmful impact on consumer spending, manufacturing and the service industries. In addition, as the economy in Europe has stagnated, the value of the Euro to the dollar has sunk (this is also true of the Japanese yen). The increased value of the dollar makes U.S. goods and services more expensive to foreign buyers and thereby curtails sales, possibly leading to a downturn in the U.S. economy. The FED is therefore very supportive of any actions that the European Central Bank takes to stimulate their economy. Accommodating the Europeans may require the FED to defer a rise in interest rates in the U.S., beyond what was recently expected. Continued lower interest rates by the FED should have a positive impact on the stock market.

Oil and Pricing

The price of oil has plummeted to below $50 per barrel. While this has been good for consumers, it appears to be an indicator of how depressed world economies have become. Part of the reason for the drop in price is the wide use of fracking, which allows greater penetration of areas that in the past would not have been profitable to develop. This new source of oil impacted the supply side of the market. With an abundance of oil, the price was bound to drop. The depth of the drop in price, however, has been exacerbated by low demand for the product. With slow to no growth in many world economies, this precipitous drop has made it clear how severe the world economic stagnation has become.  The lack of worldwide growth has been giving the U.S. stock market a signal that, over time, the impact will be felt here in the U.S. and this could mean stagnant or dropping stock prices.  Some oil companies have already laid off workers and shut down oil rigs.

Conclusion

With all of the above as a backdrop, it appears to me that the U.S. economy can continue to advance. Low cost energy, combined with increased manufacturing, increased employment, high productivity, a quality work force, and greater consumer confidence could carry the U.S. forward, until the actions of central banks in other countries trigger growth for them too. The U.S. is also the recipient of vast sums of money entering the country, seeking out stability. This stability has helped drive the price of bonds up and interest rates down so far this year, even more than what we saw last year. It is clear that the best economy in the world, at this point in time, is the U.S.

Ed Mallon

Posted January 20, 2015