As 2014 winds to a close, the year has been interesting for all kinds of reasons. Clearly the most unexpected development in financial markets was the unexpected fall in the price of oil over the back half of the year. Very few prognosticators predicted such an event, let alone those rare birds who actually profited from the rapid market decline of it's various grades (WTI, Brent). Many believed interest rates would finally rise, but this has proved the widow maker trade for those who took the bait. Over the last five years, investors have constantly bet the yield on treasury bonds would gain, especially the ten year duration. Nope. The current rate- 2.25%. No winners there.
In the equity markets, investors grappled with the threat of a less accommodative Federal Reserve with the ending of QE forever. Much was made of the threat that interest rates would head higher and stocks should fall. Again, nope. Every time equities sold off, it presented a buying opportunity, but only in specific sectors or issues which continued to outperform. From a macroeconomic perspective, the economy picked up steam after a tough first quarter, which has to be attributed to very poor weather. Even better, the price decline of oil has given the average household a shot in the arm with a few extra bucks in their pockets. As consumer spending accounts for such a heavy percentage of the economy, it was not surprising to see third quarter GDP come in at 5%, the highest number in 11 years. Clearly, those who thought the economy was poised for persistent stagflation have been in error. I would feel for them, but the negative nabobs of negativity have only provided a constant opportunity over the last five years. Indeed, if you would have listened to them in 2009, and since then, you have missed out on one of the great equity markets of all time. Still, no victory laps for investors as the biggest question now becomes, what will happen in 2015?
Before we think about trying to predict the unpredictable, let's take a look at last weeks major events. In the health care space, Express Scripts (NASDAQ:ESRX) signed a deal with AbbVie (NYSE:ABBV) to try and displace Gilead (NASDAQ:GILD) in the Hepatitis C drug market. Investors saw the deal as a paradigm shift in the biotechnology space, so all the leading performers sold off hard on the thesis the drug providers will no longer have pricing power. Russia's currency stabilized, with some, ahem, help, from the Putin government as it twisted it's bankers arms into helping protect the roughed up ruble. China helped out as well by providing a 24 billion dollar, 3 year currency swap (ruble-yuan) to assist it's largest trading partner. Do you think the fact that China has committed to buying oil and gas from Russia for the next 20 years has anything to do with the currency swap? No, of course not.
Elsewhere, Christmas came and went and the final week of the holiday shopping season brought out all kinds of estimates as to the relative robustness of retailers results. My own opinion is sellers probably did better than most believe as the crowds I saw in the malls were as large as I have ever witnessed. When you combine lower gas prices, falling unemployment rates, and plenty of holiday specials, both online and off, the urge to spurge dominated most people's thinking at this festive time.
Turning towards 2015, the weekly edition of Barron's gives us a clue on what to expect for the new year. You see, 2014 was a year when S&P 500 companies spent nearly one Trillion dollars on stock buybacks and dividends for their shareholders, up 24% from 2013. One Trillion. The magnitude of the number is significant because it shows you the earnings power of the largest companies in the world. When enterprises are shrinking the float of outstanding shares year after year, and also rewarding shareholders with increasing payouts, let's just say you want to be a participant in these activities. Will the market post another double digit gain next year? Who knows, and you don't want to base decisions on one statistic, but just remember, one trillion, with a t.
Last, but certainly, not least, I want to thank all of our clients for a fabulous year. It does not matter who you are, money is very important to nearly everyone, and my friends (all clients are friends) and family members are no exception. It is an honor, privilege, and important responsibility to take care of the financial well being of past, present, and future generations. It is nice seeing you benefit from our investing efforts and hope that will be the case for many many years. Finally, thank you for reading the blog this week. Interestingly enough, we had more readers last week than ever before, so welcome back and thanks again for showing an interest in my opinion. I hope you have a great weekend and if you have any questions regarding the column, market, or about Y H & C Investments, please email me at information@y-hc.com
Disclaimer: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.