A Bullish Mood Remains for U.S. Stocks and SRI – 2014 Into 2015

The U.S. economy picked up steam throughout 2014, and the S&P 500 Index racked up another double-digit gain following 2013’s 30% advance. The economic forecast was reasonable. Though a call for another double-digit advance might have seemed a bit of a stretch, solid market fundamentals remained in place throughout the year.

We also received exciting news about SRI in 2014. Sustainable, responsible, impact investing (SRI) assets have expanded 76 percent in two years: from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, according to the US SIF Foundation’s latest biennial survey, the Report on US Sustainable, Responsible and Impact Investing Trends 2014. 

As a result, assets managed with SRI strategies now account for more than one out of every six dollars under professional management in the United States!

The fossil free investment campaign also picked up steam in 2014, with more and more investors electing to divest their portfolios from investments in fossil fuel companies. While one of the rationales for the movement has been that climate change imperatives will make oil a much less profitable investment in the future, few could have predicted the outright collapse in oil prices during the year. We began the year near $100 per barrel and ended just north of $50 per barrel. When and where oil will stabilize is anyone’s guess, but the decline in crude is responsible for the 10% drop in the S&P Energy sector. It was the worst performing of the 10 industry groups that make up the S&P 500 Index.

Although the S&P 500 as a whole and the NASDAQ mirrored the continued improvement in the U.S. economy, other market sectors, particularly those outside the U.S., faired much less well, as the chart indicates:

Galloping Bull?

There were times this past year when we hit a patch of volatility. But the fundamentals quickly re-asserted themselves, driving stocks to new highs. These included:

  • Acceleration in domestic economic activity, which led a pickup in earnings growth. S&P 500 earnings improved from a modest increase of 5.6% in Q1 to a solid 10.3% by Q3, according to Thomson Reuters.
  • A pledge by the Fed to keep short-term interest rates at rock bottom levels for a “considerable time.” Low interest rates improve the competitive advantage for stocks.
  • Stock buybacks by corporations continue to rise. According to S&P Dow Jones Indices, combined dividend and buyback expenditures set a new record of $892.66 billion for the 12 months ended September 30, with stock repurchases representing 62% of the total. Stock buybacks reflect confidence as well as real demand for shares.

Jeremy Siegel, Professor of Finance at the highly respected Wharton School of Business and well-known market commentator, projected this time last year the Dow Jones industrials would hit 18,000 by the end of 2014; the index cracked that milestone on December 23. But although his recent analysis has seemed spot on, it’s fair to point out that Siegel was relatively bullish on stocks as part of a panel discussion that was published by Business Week in May 2000.

This highlights why First Affirmative always preaches diversification between and among asset classes. No one has a crystal ball. This has already been a historically long bull market, and one can never accurately foresee the unexpected events that may derail the most thoughtful forecasts.

A sneak peek at 2015

The fundamentals that have fueled equity gains in recent years remain in place. Even as the Fed ended its controversial bond-buying program last October, the fed funds rate is expected to remain at historically low levels through at least the end of 2015 and possibly beyond.

Moreover, the European Central Bank continues to hint that a more ambitious plan is in the works, as it battles a severe disinflationary environment. Central bank generosity has historically been a tailwind for stocks.

Yet caution is also in order. While strong fundamentals remain in place, risks never disappear, even in a diversified portfolio. We can manage but not eliminate risk – leading to the next question – what might be some of the events that could create volatility in 2015.

The year ended with oil near $50 per barrel. A recent story in Reuters noted $150 billion in energy projects around the globe face the axe. That means there will be winners and losers at current prices, though the net gain to the economy should be positive.

Lest we get too excited about alternative energy investments in the near future, however, we should remember that cheap oil at the consumer level means less immediate incentive for the use of alternative energy – and a depressed energy sector in stocks tends to include the alternative energy sector as well. Yet the outlook for the slightly longer term is improving steadily as rapid advances in recent alternative energy development are changing the economics of energy in its favor. We continue to watch these developments closely.

Slowing growth in China could dampen growth at home – yet the odds are fairly low as the U.S. simply isn’t dependent on overseas demand to drive its economy. So far, U.S. growth has accelerated in the face of global jitters.

Will we get volatility if and when the Fed hikes interest rates for the first time in nearly a decade? There are no guarantees when it comes to Fed policy, but if U.S. employment and economic growth continues at the current pace, the Fed has signaled rates will start rising in 2015. Although it is doing its best to telegraph its intentions, markets could get jittery in the interim.

Cyber-attacks. North Korea’s alleged attack on Sony quickly comes to mind. It’s impossible to forecast, but the outside chance of a big event can’t be completely discounted.

Geopolitical fears. War or geopolitical instability has historically caused short-term losses. Whether the Arab spring, Russia’s incursion into Ukraine, or the rise of ISIS in Iraq, heightened uncertainty is not a friend of investors.

Bottom line

We always stress the importance of being comfortable with your portfolio. While a fundamental tenant of our investment strategy is to mitigate investment risk as much as possible, you must be comfortable with the level of risk you’re taking as we set out to meet your objectives. If you are not, let’s talk and recalibrate.

Stick to the plan. Markets rise and markets fall, but unless there have been changes in your circumstances or you’ve hit milestones in your life (such as retirement), stay with the plan. By itself, a record high in stocks isn’t a good reason to bail out of stocks. Rebalance. Last year’s rise in equities might have knocked you out of alignment with your target stock and bond allocations. Know that we are monitoring your portfolio and will rebalance periodically as appropriate.

Finally, be proud of your SRI portfolio. As more and more investors incorporate their values into their investments and adopt SRI strategies, they are collectively becoming more influential. You are contributing to, and investing in, the kind of future in the kind of world we hope to live in and leave to our children and grandchildren. For our part, we’re proud to be your financial advisors!

If you have any questions about what you’ve read here, or about your portfolio, please let me know.

Note: Past performance is not indicative of future results. Indices are unmanaged groups of securities and are not directly available for investment.