Both the Bull and Bear Case Won in 2014

It’s often said that the market is out to confuse as many people as possible …

In 2014 we concede the Market Won!

It seems that you should have either been ultra-Bearish or ultra-Bullish to have outperformed in 2014.

On the Bear side of the ledger – An investment in 30-Year US Treasury Bonds would have yielded you +14.2% as of 12/4/14 while a more conservative Barclays Aggregate +5.7%. Bonds are normally considered safe conservative investments and in 2014 they were the beneficiary of:

  • A slowdown in Europe
  • A slowdown in China (Chinese interest rates were reduced last week – the first time in 2 years)
  • A stronger Dollar made US Treasury bonds relatively attractive to their foreign counterparts
  • A crash in commodity prices including the recent slide in Oil – no doubt precipitated by the above regions slowing down.

On the bull side of the ledger – the S&P500 is up 14% (as of 12/4/14) and a more conservative diversified equity portfolio such as the MSCI All Country World Index +6.2%. However the dispersion in equity index and sector returns was large:

  • Small cap stocks as measured by the Russell 2000 are up 2.8%
  • Emerging Markets are down -2.0%
  • Japan (Dollar hedged) +13.1%
  • Technology (SPIDER Technology ETF – XLK) is up 19% (Apple up 45%; yet Amazon down -21%)
  • Real Estate +29%; Financials +15%
  • Energy (ETF XLE) down -9%
  • Hedge Fund Long/short index +2.6%
  • Hedge Fund Global Macro +5.7% (mostly on US Dollar strength)

A mixed bag indeed!

The Average Client experience:

Looking at an average high net worth allocation the most remarkable standout has been the high level of cash … this holds true at the corporate, institutional and individual levels. A 20% cash allocation is high – versus a normal cash position of 5-10% – and is reflective of low conviction, non-committal investors. The average investor has probably achieved a 3-5% return for 2014 – not that this makes us happy by any means, it’s merely a statement of fact!

Looking Ahead:

There doesn’t seem much in the leading economic indicators to suggest any sort of slowdown is imminent in the US. It is clear markets are stretched all over the place and the elastic band eventually snaps back – the When is unknowable and frankly it has stretched beyond where we thought it would.

That said we are watching the Euro closely as it nears its 200 MONTH (that’s 16 year) moving average. An area that has signaled the end of its decline in 2010 and 2012. [Such a reversal would be antithetical due to the expected increase in Euro supply as the ECB under Mario Draghi begins its QE program ].

us-treasury-bonds

Figure 1 – Euro testing long-term support

The market will have the final word but at least we shouldn’t have to wait too long since the Euro is already testing this zone!

Warm regards,
Greg

Ps. a rebound in the Euro will most likely mean a reversal in most of the performance trends we cited earlier in this article.

Best Regards

Greg
Greg Silberman CFA®, CAIA, CA(SA)

Chief Investment Officer

Advisory Services offered through Atlanta Capital Group.

Securities offered through Triad Advisors, Member FINRA / SIPC.

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