David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141

2014 in Review: Oil, Commodities & Currencies… Oh My!

January 29th, 2015

As the current bull market (est. March 2009) nears the end of its 6th year, the breadth of equity outperformance has declined and pockets of value are harder to find.  While the U.S. stock market ended 2014 near all-time highs, leadership is increasingly concentrated among the largest companies, which drive performance of market-capitalization weighted indexes such as the S&P 500 (+4.9% in Q4, +13.7% in 2014).  Despite a strong 4th quarter, small cap stocks lagged in 2014.  The Russell 2000 Index rallied 9.7% in Q4, yet finished the year up only 4.9% (including dividends).  International stocks (both developed and emerging markets) delivered mostly positive returns in local currency terms, but modestly negative returns for U.S.-based investors, as the dollar appreciated approximately 13% against a basket of major foreign currencies in 2014.

This relatively pronounced currency movement is attributable to both strength in the U.S., and weakness abroad.  Based on common macroeconomic indicators (GDP growth, unemployment, etc.), the U.S. is further along in its recovery from the Great Recession than the Euro Zone or Japan, and that reality is reflected in monetary policy.  The U.S. Federal Reserve ceased its “quantitative easing” program in late 2014 and guided toward a likely increase in short-term rates sometime in 2015, assuming the economy continues to expand.  Meanwhile, both Europe and Japan continue to maintain a very accommodative (low interest rate) monetary policy, as these countries face a greater threat of deflation.  Anticipating higher interest rates in the U.S., many investors have begun re-allocating towards dollar-denominated assets, causing the dollar to rise and foreign currencies to weaken.  In our view, currency movements of last year’s magnitude are relatively infrequent in developed markets, and tend to be self-correcting once the pendulum swings too far in either direction.   As an aside, those interested in learning more about the pros and cons of a strong dollar might enjoy this recent NYT article on the subject. Read the rest of this entry »

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