As we move into February, forecast-beating U.S. payroll data sparked a jump in bond yields. The dollar gained. Month-to-date, stock returns erased January losses. Economists were pleased. As an investor, how should you react to good news like that? How about the negative news? And of course the financial press has plenty of baseless predictions and forecasts at the start of each new year. Our advice is the same, no matter what the news brings. Remain disciplined and focused on a sound investment philosophy. If your situation has changed, do an allocation checkup. Never invest based on your emotions. And tune out the noise of financial pundits.
U.S. equities began 2015 on a rough note. The S&P 500 closed at 1,994.44 to post a 3.10% decline, its worst monthly performance in a year. The S&P MidCap 400 ended the month down 1%, and the S&P SmallCap 600 declined 3%. For the one-year period, the S&P 500 index is up 11.92% versus 9.29% for the MidCap Index and 4.83% for the SmallCap index.
While the U.S. economy continued to shows signs of strength, new government data put the growth rate at 2.6% in the final quarter of 2014. That pace represents a downshift from the 5% rate of growth in the third quarter and is slightly below economic forecasts. Energy companies suffered from a sharp drop in oil prices. The strong dollar undermined profits for some big multinational companies and U.S durable goods orders for December were weaker than expected.
Fixed income indices rose in January. Yields declined across the board leading to a 1.47% return for the Barclays U.S. Aggregate Bond Index. The S&P/BGCantor 7-10 Year U.S. Treasury Bond Index finished the month 4% higher.
Outside the U.S., the developed markets, as measured by the MSCI EAFE index, returned 0.5% while the MSCI Pacific Rim Index returned 1.48%. In local dollars, the MSCI European Index returned 7% as the ECB unveiled a bond-buying plan that exceeded expectations. The developing markets as measured by the MSCI Emerging Market Index returned 0.6%.
Commodities performed poorly across the board. The Dow Jones Commodity Index and the S&P GSCI Index declined 4% and 8%, respectively. The Energy sector continued its weak performance, losing -9%.
The DJ Wilshire REIT index moved sharply higher, returning 6.5%. Currency markets became much more volatile as the Swiss National Bank acted aggressively, abandoning its policy of capping the franc against the Euro ahead of the European Central Banks’ decision on quantitative easing. Gold shares rallied 5%.
KNOW YOUR STRATEGY
This is the time of the year when the media tends to be filled with lofty predictions and forecasts that are baseless and amount to no more than “noise”. Granted, at times when it comes to investing, emotions can get in the way, thereby allowing us to be unsettled by the latest headlines. And overconfidence may lead us to believe that we’re better at investing than we actually are. Or worse, that we can predict which way the markets will move.
For example, no one knows for sure which country, sector or asset class will be the top performer this year. And jumping into an individual company based on its recent momentum or popularity does not constitute a sound strategy. So why do we care? Because we need to constantly remind ourselves to remain disciplined and focused on a sound investment philosophy. In sum, a long-term orientation and broad diversification coupled with realistic expectations and a suitable asset allocation based on unique needs and preferences remains the way to go!