It’s hard to believe we’re already 6 weeks into 2015. It seems like the holidays were just a few days ago, but in reality we’re well into the year. Several themes have emerged and I think it’s worthwhile to review these:

This year our forecast is for a relatively flat U.S. stock market, let’s say a band of 0-5% for the S&P 500. Even though markets are hitting new highs, we’re still in this range, see the chart below of the S&P 500 year to date:

January started out choppy for stocks but a nice rally in February has left us in positive territory. Several items helped spur the rally, they are:

First, Apple’s stock (the biggest component of most major stock market indices) has been running. The G33 has owned a position in Apple since the inception of the portfolio and they reported very good earnings for the 4th Q of 2014. See the Apple (AAPL) chart below, it’s up 15% this year:

Second, the price of oil has stabilized, helping energy sector stocks recover. We still believe it’s premature to call a bottom in the price of oil and/or energy stocks. The chart below illustrates the price of oil (red line) and the XLE, energy stock ETF (blue line) year to date:

Third, optimism is creeping back into the European economy amid signs of a modest recovery taking place due to the QE (bond buying) program recently launched by the European Central Bank (ECB). This is good because Europe is the second largest economy in the world and is a big market for many U.S. based multinational corporations. Look at the chart below, all the countries in the Eurozone are showing GDP growth except Greece:

We still believe the International markets will provide opportunity for investors this year and next. The ETF Endowment Portfolios and the Gradient Tactical Rotation Strategy (GTR) provide exposure to this theme.

Finally, interest rates have remained low this year despite fears that the end of the Federal Reserve Bank’s QE program could drive interest rates higher. This helps the relative attractiveness of stocks versus bonds. The 10 year Treasury yield nosedived in January, rose in February and has remained relatively flat year to date. We forecast 10 year Treasury yields to remain range bound between 2.00 and 2.50% for the year. See the chart below:

Closing this week I’d like to highlight a chart that shows the real power of owning blue chip stocks, collecting dividends, and holding for years. The best performing stock since 1968 is probably not what you’d think. One dollar invested in this company in 1968 was worth $6,638 yesterday (including dividends). That’s an annual return of 20.6% for nearly half a century. The same dollar invested in the S&P 500 would be worth $87, or 98% less. See the chart of this stock below:

The company (and stock) is Altria/Phillip Morris, the tobacco company. The G50 has owned this stock since I’ve been at Gradient Investments. They’ve been able to raise prices, pay (and grow) a dividend, and expand internationally for decades. A boring business, not a lot of innovation, but great for shareholders. Too bad I didn’t put a few bucks myself into the stock back in the 60’s.

As of February 17th, 2015:

Dow Jones US Moderately Conservative Index is up 1.44% (TR) for the year

S&P 500 closed at 2,100.34 (TR) up 2.30% for the year

U.S. 10 year Treasury Futures are yielding 2.13% down 0.04% for the year

WTI Crude Oil futures closed at $53.50 down $0.21 for the year

Gold closed at $1,207 per ounce up $52 for the year

To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Nevada Retirement Planners team.

In last month’s commentary we highlighted the likelihood of greater market volatility in the New Year. This proved to be an understatement as volatility spiked twice in January and the Dow Jones Industrial Average had 19 triple digit moves in the first 25 trading days of the New Year. Volatility found its way into all markets for a variety of reasons.

In commodities, oil prices continued their slide on supply and demand concerns as the stronger dollar helped support lower prices.

In currencies, Switzerland shocked the foreign exchange markets by removing their peg to the Euro dollar sending the Euro into a death spiral. The Euro reached and eleven year low against the dollar as the European Central Bank plans to initiate their forms of easy monetary policies.

In stocks, mixed signals came from: weak retail sales, strong consumer confidence, Europe, lackluster fourth quarter corporate earnings, and heightened political uncertainty. All of this lead to higher volatility as measured by the VIX Index shown below.

In bonds, interest rates are collapsing globally and deflation is now a word heard around the world.

Expect the stock market to experience continued volatility as we move through 2015. Volatility has two sides, while January was down for the month for U.S. stocks there will be some profitable months down the road. We are fast approaching a six year bull market in stocks and stock valuations are reflective of where we are in this cycle. The recent rebound in oil prices is positive for the equity market and will also give the high yield bond market a much needed boost. Geopolitical events are impossible to handicap, but greater uncertainty this year will add to the likelihood of more sudden price movements. At the end of the day, long-term investors looking for dividends and price appreciation need to be patiently invested in the global stock markets.

Bond yields are low and likely to stay here for an extending period of time. The Federal Reserve has limited room to operate given the global bond and currency markets. Interest rates around the world are low and the slow go economic forecasts are likely to keep rates down. The U.S. economy continues to be the best horse in a bad horse race. This is causing the U.S dollar to strengthen relative to other currencies. If the Fed raises short rates 25 or 50 basis points higher in the second half of the year, expect the dollar to get even stronger and the yield curve to flatten. Bond return expectations for 2015 should be in the two to four percent range.

When volatility runs high, emotions run high. 2015 will be a challenge for investors allowing emotions to creep into their decision making process. If your financial plan is well designed, let it work for you over the long haul.

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