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Investment Letter

4th Quarter 2014

January 1, 2015 

As 2015 begins, we would like to review some of the major news headlines from the past twelve months.  The year began with the success of the Winter Olympics in Sochi, Russia despite worldwide skepticism.  The crisis between Russia and the Ukraine escalated as Russia annexed the entire Crimean Peninsula and started a proxy war in the Eastern Ukraine. U.S.-Russian “Cold War” rhetoric returned quickly.  One Malaysian Airline flight disappeared, and a second was shot down while flying over Ukraine.  The continued rise of the group ISIS reintroduced horrible and inhumane attacks across Iraq and Syria.  Officials fought to contain the deadly outbreak of the Ebola virus in Western Africa, and the threat of a pandemic placed global citizens on high alert.  The new One Trade Center building in New York City opened 13 years after the 9/11 terror attacks destroyed the World Trade Center Towers.  European scientists made history when they successfully landed a spacecraft from Earth on a comet speeding through deep space.  Putting an exclamation point on an already newsworthy year, the current U.S. Administration decided to restore diplomatic ties with Cuba. 

 The financial markets also had an abundance of eventful days in 2014.  The bumpy start in January left investors wondering if this would be the year markets reversed course.  The market showed its resilience despite additional rough patches in April and October.  In the end, most investors were happy with the overall performance of the financial markets.  The Dow Jones Industrial Average (DJIA) finished the 4th Quarter with upward momentum and delivered a positive 2014 total return of 10.04%.  The S&P 500 Index also benefited from the quarter-end rally to post a positive 13.69% total return for the year.

 The table below recaps the 4th Quarter and year-to-date performance of other major indices: 


Asset Class


4th Qtr. 2014 Total Return

2014 Total Return


ML Three-Month U.S. Treasury



U.S. Bonds

Barclays Intermediate-Term Treasury



U.S. Large Co. Stocks

S&P 500



U.S. Small Co. Stocks

Russell 2000



International Stocks

MSCI EAFE (net div.)



Real Estate

DJ Select Real Estate Securities



  Asset class returns for the past year clearly show the domestic bull market has not yet fizzled out.  Using the S&P 500 Index (U.S. Large Company Stocks) as an overall indicator for the domestic stock market, the performance data shows the index has delivered six consecutive years of positive annual total returns.  The current three-year stretch (2012-2014) has been very profitable as each year posted a double-digit return.  In particular, 2014 has been a record breaking year as the benchmark tallied 53 new record highs.  Consider that over the last twelve years, the S&P 500 index has an average annual total return of 9.55%, a cumulative total return of 198.90%, and has experienced only one calendar year (2008) with a negative annual total return (-37.00%).[1]

Continued improvement in the U.S. economy aided and enabled the current bull market.  The most recent estimates on GDP show that the economy expanded at 5.0% for the third quarter of 2014.  Improvement in growth was attributed to positive contributions from personal growth expenditures, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment.[2]  The December Employment Report from the Bureau of Labor and Statistics showed significant support for the improving economy as nonfarm payrolls rose and the unemployment rate fell to 5.6%.  The unemployment rate has now fallen 1.1% since December 2013 and is down 4.4% since the October 2009 high of 10.0%.  Additional economic data showed that corporate profits during the third quarter of 2014 increased, inflation remained low, consumer spending was up, manufacturing activity expanded, and real estate activity was still muted.  In aggregate, these economic indicators have increased consumer confidence in the economy.  According to of the University of Michigan’s overall index of consumer sentiment, the 2014 final reading is at 93.6 for December.[3]  This is an increase from the previous month, and the highest reading in nearly eight years.


The decline in oil prices during the quarter also played a major role in the consumer’s improved outlook for the economy.  West Texas Intermediate crude oil prices plummeted during the 4thQuarter by 41% from $91.17/barrel to $53.45/barrel.[4]  The fall in oil translated into a welcomed decline in gasoline prices.  According to the American Automobile Association (AAA), the national average per gallon fell from $3.28 in January 2014 to the December 2014 low of $2.26 (lowest since May 2009).  AAA estimates that Americans have saved a total of $14 billionon gasoline from 2013 to 2014 with an average savings of $115 per U.S. household.[5]  Although most of the savings came in the final months of 2014, the 2015 amount could be even larger if prices remain low for the majority of the upcoming year.

From an economic point of view, the decline in gas prices acts as a huge tax cut.  The individual consumer benefits with extra discretionary cash to spend, and the overall economy gets a boost from consumers with extra disposable income.  These discretionary dollars get spent, yielding further disposable income by the receivers, and has a multiplicative effect upon economic growth.  The amount will be dependent on the duration of low prices, but the impact will be positive for economic growth.  The central factors in the price decline have been the increase in U.S. oil production and OPEC’s unwillingness to intervene by cutting supply.  Consumers of gasoline, heating oil, and natural gas are the obvious winners.   On a larger scale, the increase in U.S. production is a step in the right direction for U.S. energy independence, and a victory for free market trade fundamentals.  Losers are oil producing countries without deep pockets (Venezuela, Iran, Nigeria, Brazil, and Russia).  Domestic losers will be states that have oil as a major economic industry (Alaska, North Dakota, Texas, Oklahoma, Louisiana), and the higher cost producers of shale and tar sand oil.

Due to the improvement in the U.S. economy, the Federal Reserve ended the asset purchase program in October 2014.  They decided to maintain their existing policy of reinvesting principal payments in agency mortgage-backed securities and will keep rolling over maturing Treasury securities at auction for the foreseeable future.  The minutes from the December meeting of the Federal Open Market Committee (FOMC) confirmed that the economy is expanding at a moderate pace and will keep the federal funds rate at the current target range of zero to ¼ percent.  The Committee stated they will be patient in beginning to normalize their stance on monetary policy (rate hikes).  Any increase in the target range for the federal funds rate will be data driven and could occur sooner or later than anticipated if conditions warrant.  Based on all indications from the Fed, a rate hike is probably in the near-future.  The timing depends on the next several months, but a good guess would likely be mid-2015. 

The economic environment overseas continues to disappoint despite great promise.  Many areas in the Eurozone are flirting with recession and facing economic stagnation.  The European Central Bank plans to launch its own version of quantitative easing in 2015 to help guide the euro area away from deflation, but the worry is the program will not be big enough to make a significant impact.  Compounding issues, Greece is about to have an election on leaving the Euro that Spain, Italy, Portugal and others will watch quite closely.  Elsewhere in Europe, the combination of falling oil prices and the Ukraine conflict are derailing Russia’s economy.  In Asia, Japan’s economic growth remains subdued as they struggle to find an effective mix of fiscal stimulus, monetary easing, and structural reform. China’s economic growth rate continues to slow down, but still remains the bright spot in Asia.  Over the last few years, Chinese policy makers have undertaken the task of implementing structural reforms that address environmental and social imbalances.   Now they will have to balance the pressures of economic reforms to ensure the sustainability of future growth.  In general terms, emerging market economies are facing muted growth due to falling oil prices, slower economic activity, and heightened geopolitical risks, but painting a picture of emerging economies with such a broad stroke does not provide an accurate view of all regions and countries.  Asia-Pacific economies should maintain their growth momentum and remain global growth leaders.  Emerging/Developing economies are a mixed bag with dim prospects for sustainable short-term and long-term growth.  Overall, international economies are struggling.

Our outlook for the domestic economy and financial markets remains favorable.  We believe that domestic growth will improve in 2015, and we are hopeful that the improvement in growth will lead to more jobs, higher household income, and higher housing starts and sales.  We are confident that the current bull market will live to see its sixth birthday and possibly even more.  We believe stocks are more fairly valued than they have been, and earnings should be solid going forward.  We think the recovery will continue at a modest pace, but investors should not assume the market will deliver returns like we have seen the last several years.  We expect the financial markets will have frequent periods of pullbacks and recoveries during the next year.  The frequency and duration of the volatility might seem extreme, but it is important to keep a long-term focus and not stress about the daily gyrations.  We expect the dollar to maintain its strength relative to other foreign currencies, and we anticipate some improvement in international economies due to the decline in oil prices, weaker currencies, and more accommodative monetary policies.    

We assume the FOMC will raise rates this year, and that a mid-year rate increase will be the first in a series of hikes to bring interest rates back to a normal level.  The effect on investors should be minimal at first.  However, as the federal funds rate moves higher, the cost of financing debt and purchasing goods (homes and cars) will increase, but liquid assets (certificate of deposits, money markets, savings and checking accounts) will benefit after earning next to nothing for several years.  Of course, economic conditions and the strength of the dollar will influence the Fed’s rate hike timetable for 2015. 

As we have often stated, our investment philosophy remains based on the fundamentals and it is time---not timing---that matters most.  Remember…a successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process.

See the list below for some interesting 2014 market facts.

·    MISSING THE BEST- The total return for the S&P 500 was a gain of +13.7% (total return) in 2014. If you missed the 5 best percentage gain days last year, the +13.7% gain falls to a +3.2% gain (source: BTN Research).

·    AVOID THE WORST- The total return for the S&P 500 was a gain of +13.7% (total return) in 2014. If you avoided the 5 worst percentage days last year, the +13.7% gain rises to +26.4% gain (source: BTN Research). 

·    THE LONG-TERM AVERAGE- The S&P 500 stock index has gained an average of +9.9% per year (total return) over the last 50 years (i.e., the years 1965-2014). No single calendar year actually gained +9.9% in the last half century. The closest that any year came to the long-term historical average was in 1993 when the stock index gained +10.1% for the year (source: BTN Research).

·     BEFORE THE BULL BEGAN- The 2 worst bear markets for the S&P 500 in the last 80 years took place in the last 15 years, i.e., since the beginning of 2000 (source: BTN Research).

·     NO CORRECTION- The S&P 500 has gone 1,189 calendar days (i.e., from 10/03/11 through and including 1/04/15) without a 10% or greater drop in the index, the 4th longest stretch without a double-digit pullback in the last 50 years (source: BTN Research).

During the past year, I was pleased to be included in the following publications: 2014 Memphis Magazinelist of Five Star Wealth Managers, the 2014 Medical Economicslist: Best Financial Advisors for Doctors, and the 2014 Dental Practice Management/Dental Products Report : Best Financial Advisors for Dentists.

Your financial health is important to us, so consider making a New Year’s resolution to revisit and update your financial plan.  Please feel free to contact our office to set up an appointment to discuss any changes to your financial situation. 

As our firm enters its 32nd year of providing advisory services, we want to wish you and your family a happy, healthy, and prosperous New Year.  Should you have any questions, or wish to receive William Howard & Co.’s SEC Registration Form ADV Part 2A and Part 2B Narrative Brochure, please let us know. 

In closing, we want to thank you for the opportunity of working with you and for your continued confidence and trust.  Please contact me if you have any questions. 

With kindest personal regards, I am

Very truly yours,




[1]Source: S&P 500 Index return data provided by Dimensional Fund Advisors as of 12-31-2014.

[2]Source: Bureau of Economic Analysis, Gross Domestic Product: Third Quarter 2014 (Third Estimate). http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[3]Source: The Regents of the University of Michigan retrieved from http://www.sca.isr.umich.edu/charts.html

[4]Source: Federal Reserve Economic Data, Crude Oil Spot Price Report from 9/30/2014 through 12-31-2014. http://research.stlouisfed.org/fred2/series/DCOILWTICO#

[5]Source: AAA Gas Report, 31 December 2014.


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