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If we were allowed to use only one word to describe this year’s economic performance, it would be “uneven”. The economy contracted -2.1% in the first quarter, largely driven by weather events. The second quarter results looked much better, with the economy expanding at a +4.6% annual rate. (Third quarter results won’t be out until November, but analysts expect something in the +3% range.) Overall, 2014 is expected to reflect economic expansion in the +2.5% to +3% range. Not terrible, but not great either. Business results are certainly leading the way, as both corporate profits and business investment continue to show improvement. The other leg of our economy, consumer spending, is limping along. Employment has improved a bit, but it hasn’t translated into higher wage growth. Employment growth has averaged more than 200,000 new jobs per month, but wages are still only growing at the same rate as inflation. So don’t count on the consumer to carry the economy higher. The economy’s performance for the rest of the year will largely depend on continued improvement in the labor market. In sum, the plowhorse economy continues to plod along. Good, but not great.

Meanwhile, a soft global economy is weighing on the US as sagging growth in Europe and Asia restrains US exports. Europe’s recovery from the 2007-2008 Recession remains uneven, with some countries showing minor economic growth while others are stagnant.  China’s economy is still growing, but a troubling real estate bubble could derail their growing demand for both natural resources and imports from trading partners. Emerging markets have been a bright spot this year, as small, more nimble economies have expanded.

In Washington, the Fed is winding down its controversial “quantitative easing” program this month. We remain concerned that the Fed’s policy of keeping rates artificially low by inflating its balance sheet will create unintended (and unknown) consequences down the road. While we don’t believe rates will increase until 2015, the anticipation of the inevitable is already being reflected in both the stock and bond markets globally, contributing to the “unevenness”. We encourage readers to keep a close eye on the Fed’s moves over the balance of this year, as they will undoubtedly influence both the investment markets and the economy.

Finally, geopolitical worries have once again taken center stage. Sanctions against Russia have destabilized their economy, resulting in threats to seize the assets of multinational companies doing business there. This development, if pursued, could have significant consequences for global companies worldwide. Meanwhile, the startling rise of ISIS in the Middle East has proven to be more than a mild distraction to world leaders, resulting in the US once again being pulled into a foreign military conflict with no easy answers or solutions.

Turning to investment market results for the year, the word “uneven” once again applies. The following chart reflects the performance through September 29th for various asset classes.

Asset Class YTD Return (as of 09/29/2014)
US Stocks(S&P 500 Index TR, 10/01/14) +5.29%
US Small Stocks(Russell 2000 Index TR, 09/30/14) -4.41%
International Stocks(MSCI EAFE Index, 09/30/14) -3.63%
Emerging Markets(MSCI EM Index, 09/30/14) +0.26%
US Fixed Income(Barclays US Treasury 1-3yr Index) 0.55%
Real Estate(FTSE NAREIT All REIT Index TR, 09/30/14) +13.08% 
Commodities(Dow Jones Commodity Index, 9/30/2014) -7.80%

Investors in well balanced and diversified portfolios own some portion of most all of these categories. As a result, most portfolio returns this year have been modest to flat. In terms of investment policy, we remind readers that successful long-term investors don’t have a short-term market outlook; they have an investment philosophy. Part of that philosophy is that “patience pays”.

For those readers who are currently adding money to their investment portfolios, domestic and global events such as those outlined above warrant a “defensively opportunistic” approach to investing. This translates to a portfolio which contains the following:

  • A broad array of equities around the globe for growth potential,
  • Defensive assets such as short term fixed income for stability,
  • Alternative investments – to provide diversification across assets other than stocks and bonds,
  • Tactical managers focused first on preservation of capital and second on capital growth.

Your allocations to each of these important areas should be consistent with your tolerance for risk and your long -term planning objectives.

 

If you have any questions or would like to learn more regarding your current allocations, please don’t hesitate to give us a call.