At Atlas, we believe investing is a long-term exercise. We don’t factor portfolio decisions on the day-to-day goings on in the global market; in hindsight, the daily price spasms predominantly look like noise.
It’s not that we don’t have market opinions. The “trader” in us sees that asset valuations may be more volatile in 2015 given how uncertain the world is beyond our shores. Alas, trying to time markets is a fool’s game.
The truth is that nobody really knows where markets will be a year, two years or some random time in the future.
Outlook
In the current season of annual pundit commentaries on the “direction” of the market, we offer a small piece of insight – it’s probably more rewarding to read a good novel or go for jog; neither one should increase your stress.
We won’t prognosticate. However, below are some of our brief thoughts about the global state of financial affairs:
Fed Chairwoman Yellen has been quite vocal with her communications that the central bank will start raising rates in 2015, presumably because of improving economic productivity and employment.
Investors and strategists are extremely concerned about what the imminent tightening will mean for bond prices, equity valuations, and the economy as a whole.
Yellen’s Fed
Has everyone forgotten that the tightening cycle started in late 2013 when the Fed started curtailing its bond purchase program?
Yes, short rates may begin to rise, after all, we can’t ignore what she is saying. But how far can longer-term rates rise, if at all?
The current US Treasury 10-year note yields 1.98%. By comparison, comparable German and Swiss rates are 0.48% and 0.18%.
So, if you are worried about oil prices, Greece pulling out of the Euro currency union or Russian corporate defaults, what safe haven will global investors use to park their money?
Separately, do equity valuations look absurd given low “risk-free” rates? We don’t think so.
Stocks
The equity markets have been in turmoil ever since the price of oil started plummeting in the summer of 2014. How long will this pain last? Short answer, we don’t know.
However, does it make sense that one of highest expense items on the economy’s income statement would be a bad thing after a 50% drop? Might this drop in price not stimulate consumer demand, corporate risk taking, and improve profit margins?
The Saudis are playing the old John D. Rockefeller game of trying to weed out competitors. In this case, US shale oil producers. There will be some over-levered players that fail, but most of the pain actually will be felt in Riyadh, Caracas and Tehran.
Euro
We have always been skeptical about the long-term viability of the euro currency. Conceptually the currency makes competitive sense, but it has no central controlling mechanism.
There is no central bank that holds purview over the continent’s banks; the ECB may bark, but it doesn’t control German or Italian banks the way our Fed controls Citi and JPM Chase.
European politicians are indifferent to Greece’s current political situation and its potential effect on the euro. The narrative is fairly simple: the height of the euro crisis has past, Greece is a small percentage of the Union, and a Greek euro exit would be a non-event.
Hmmm. So, if Europe falls back into recession and weaker Mediterranean countries revisit the stresses of 2011, do you really think their respective populations are going to stand for another round of austerity programs when they haven’t exited the first?
Will the French and German banks continue their support? What if Greeks are happier one year hence? If there are problems in Europe, where do you think the capital flight will go?
Russia
Russia is a huge wild card and investors are concerned. Should it be perceived as such? Well, clearly the destabilizing potential of its military balance sheet is always cause for concern.
However, it’s a country with a population of less than 150 million, its infrastructure and income are entirely dependent on one commodity, it’s the poster child for economic cronyism and inefficiency, and the central bank has $300 billion in currency reserves.
The reserves figure may seem sufficient in light of the sovereign’s modest external debt. However, the corporate sector has $600 billion of external debt that’s tough to service in the face of sanctions and a deteriorating Ruble.
Does Putin stay intractable in this reality with oil below $50? Perhaps. But what happens if his stable of protected oligarchs start revolting?
The point is that a Russian economic collapse would be far less unsettling to global finance than the 1998 default. The pain would heavily weigh on the Russian people. There’s a reason why all the Russian bids for London and NYC real estate have suddenly disappeared.
No one knows where financial security prices will go with so many influential variables in flux. That’s why we emphasize risk diversification. We are currently overweight US equities versus our benchmarks and underweight international stocks.
In these interesting times, the underlying theme is fairly clear – the US may have its own set of problems but, economically and financially, we are still the best game in town.
Photo Credit: Sam Howzit via Flickr Creative Commons
DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
