Engine Still Running Under the Hood

If you were to hand an investor this fact pattern with no indication of a time period

and ask for their guess as to the market environment, it is likely you would get a

dour answer. It is stereotypical of a “risk off” environment – economies are slowing

down, unemployment is rising, consumer and industrial activity is falling off, etc.

Now add the date: January 2015. This does not exactly match up. Q3 US GDP growth

is 5% on an annualized basis and expected to continue. Employment and wages are

growing in the US. Globally, government is becoming less of a drag. Japan has taken

stimulus to warp speed. Europe kept out of recession (no thanks to the ECB) as the

austerity march reversed. China hard landing has not materialized the way some

pundits expected despite further liberalization of their economy.

You have to look under the hood to see what is going on. Oil prices are falling

because of technology-driven supply growth lowering the cost of an economic input.

Inflation is falling mostly because of energy (in the developed world). The US Dollar is

rising because the Fed is likely to raise rates when the rest of the world is still

lowering them. Long-term rates in the US are falling because inflation expectations

are coming down, and the US is the new “carry trade” for international capital flows.

Generally speaking, this is a world where economic growth marches forward.

This is not to say that we are dismissive of these major trends heading into 2015.

Quite the contrary; we have evaluated each and warn investors that volatility will rev

in the year ahead. We are prepared to revisit the roadmap as needed but feel

confident that the “vehicle” by which we achieve our individual investment goals

remains in running shape.

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