Hoyte Pyle: For Investors, Here’s The Good, The Bad And The Ugly

Editor’s note: The author of this guest commentary, Hoyte R. Pyle, CFA, is a Senior Wealth Consultant with BancorpSouth Asset Management and Trust. He can be reached by email at [email protected].

Looking back on an eventful 2014, I am in many ways reminded of the old Clint Eastwood movie, “The Good, The Bad, and The Ugly.”

THE GOOD
Fortunately, most of the positive events in the markets occurred here in the United States. In fact, the U.S. appeared to be the best house in a bad neighborhood.

Labor markets improved as the unemployment rate fell below 6%, gross domestic product (GDP) growth was positive, and consumer level inflation remained tame at 1.3%. We also averted another government shutdown as Republicans gained control of the Senate and maintained control of the House in the November elections.

These events helped push the domestic stock markets into positive territory with the Dow Jones Industrial Average up 10.04% and the S&P 500 Index up 13.7% for the year.

The U.S. bond market surprised many investors as longer term rates actually declined .87%, as measured by the 10-year treasury yield, and the Federal Reserve’s Open Market Committee curtailed net purchases of treasuries and mortgage-backed securities (MBS).

In addition to decreasing interest rates, inflation remained subdued with wholesale prices gaining 1.4% for the previous 12 months. Lastly, the dollar rose almost 11% with the expectation of higher domestic rates and lower rates abroad.

THE BAD
Unfortunately, things were not so rosy outside the United States.

We saw a civil war in Ukraine, a recession in Japan, a slowing Chinese economy, and Russia struggling with a significant drop in oil prices. Geopolitical concerns escalated with increasing activity from Islamic State groups worldwide.

These challenges were reflected in the performance of international stocks in Europe, Australasia, and the Far East per the MSCI EAFE Index, which finished down 4.9% for the year.

In response to the slowing growth, we also saw a number of countries implement stimulus measures, as evidenced by the European Central Bank (ECB) cutting a key interest rate to -0.1%.

THE UGLY
The oil industry took it on the chin in 2014, as prices collapsed more than 40% from a high of $107 a barrel to less than $60 a barrel. OPEC indicated it would not reduce production in an effort to maintain market share, which while certain to have an impact on oil and gas-producing states like Texas, Oklahoma, and North Dakota could provide a windfall to consumers, as they pay less for gas at the pump.

LOOKING AHEAD
The backdrop continues to be favorable for the domestic stock markets with recent positive GDP growth, an improving labor market, and low interest rates and inflation.

Falling gas prices, while challenging for the oil industry, are also a welcome sight for consumers and have been compared to a tax cut since they can increase discretionary income for both individuals and businesses.

There continues to be quite a bit of speculation that 2015 will be the year the Federal Reserve will begin to raise short term interest rates. Clearly, this would have an impact on fixed income securities as rising rates normally have a detrimental impact on the price of bonds. This could also result in a further strengthening of the dollar, particularly if other central banks continue to lower rates.

Internationally, the challenge for countries like Japan, China, and parts of Europe will continue to be finding ways to stimulate growth by lowering interest rates and purchasing securities in the open market.

It could wind up as a race to the bottom as currency rates continue to depreciate.