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Lindsey Report – January


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Happy New Year to all and here’s hoping that 2015 will be a good year for you.

Domestic equities (as measured by the S&P 500), by most accounts had another solid year in 2014.  Our economy continued to expand and interest rates have remained at low levels.  Regarding expansion, the Commerce Department, in their 3rd and final revision to 3rd quarter GDP, reported that the U.S. economy grew by 5% !  We have not experienced a stronger number during the current recovery (Rueters)!

Unfortunately, the excitement created by this strong report seems to have been short-lived, as the equity markets have started off 2015 with a rather lousy ring.  While some believe that the first five days of a New Year can predict the entire year’s performance, I think it’s just five days in January.  I believe that fundamentals, corporate profits, world events, etc… in 2015 will determine where we are by year’s end.

One of the main culprits of this early sell-off has been the continued fall in oil prices. To start the year, West Texas Int. and Brent Crude both continued to tumble.  Both fell below $50/barrel on 1/6, which was the first time since April 2009.  Oil has had a rapid decline and it is in a serious bear market, falling more than 50% since last summer and 40% in three months (Bloomberg).

There is now doubt that lower oil prices are a bonus for consumers all over the globe: the biggest of which is that we pay less at the pump.  In fact, a client told me that they just used their “Kroger Points” to pay less than $1/gallon.  However, steep drops in oil prices can be viewed as an “economic signal”.

In a recent PIMCO article, they noted that similar steep drops have occurred over the past 30 years.  In some cases they coincide with faster global growth (1993 and 1998), while other times they are associated with periods of “the R word” (1991, 2001 and 2008).  They argued that it generally boils down to “why prices fell”.  If the price decline was driven primarily by excess supply (too much being produced), then it was a positive.  Conversely, declines that were driven by a lack of demand have generally been a negative.

PIMCO contends that “70%” of this drop has been driven by excess supply and the balance by reduced demand.  I hope they are in the ballpark.  While it is too soon to tell, I’m confident about one thing: markets have a tendency to massively overreact in the short-term and I think this is one of those times.

 

 

The opinions voiced are for informational purposes only and are not intended to provide specific advice to any individual. To determine which investments are appropriate for you, consult myself prior to investing. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  The economic forecasts set forth in this commentary may not develop as predicted and there can be no guarantees that strategies promoted will be successful.

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