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QUARTER 1 2015
MARKET REVIEW & OUTLOOK
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • [email protected]
QUARTER 1 2015 MARKET REVIEW & OUTLOOK
Equity markets are a lot like soap operas in that
they often repeat story lines, so experience can
help avid followers of each predict how the future
will play out.
Last year, the Fed ended its third round of
Quantitative Easing (QE), which is a strategy
to push down the yields of safer investments
(bank CDs, money market funds, etc) and force
investors into riskier assets. Central banks use
this policy as a last resort to help stimulate an
economy by encouraging companies to borrow
ultra-cheap debt to hire new workers and invest
back into their businesses.
It’s hard to say if QE even created a meaningful
supply of new jobs through the years it was in
place, but what’s indisputable is its effect on
asset prices. Those who require evidence should
look no further than the 5-year performance of the
S&P 500 index (up over 170%).
The surge in equities here in the U.S. has
seemingly caught the attention of central banks
across the world, as many have either begun their
own QE programs or have hinted at the potential
to start one in the near future. Most notably, the
European Central Bank began a very aggressive
form of QE just weeks ago, and the results can
already be seen in the chart below.
1Q 2015 Global Indices Performance
Source: Aviance Capital analysis, Bloomberg
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • [email protected]
QUARTER 1 2015 MARKET REVIEW & OUTLOOK
The returns from the major European and Asian
indices confirm three key conclusions:
1. Central Banks Force Stocks Higher: Just as loyal
soap opera fans can spot a similar trend in a
story line, investors who believed that other
central banks across the globe would copy
the Fed got paid very well. The central banks
of Europe and Japan are knee deep in their
own QE programs, and the results are not
surprising despite both economies dealing
with structural issues that QE cannot fix.
2. Investors Only Needed a Hint: Commentary
from Chinese leadership that hinted to easing
monetary policy in the future has cause the
market to surge 16% this past quarter and
93% over the past 12-months. Even the mere
notion of the potential for looser central bank
policy can cause an equity market to spike.
3. It’s now up to Earnings: The S&P 500 barely
eked out a gain for the quarter and massively
trailed the other indices. Why? I believe it to
be the fact that the Fed ended QE last year,
and investors now expect earnings to be the
fuel to push U.S. equities higher.
NOTE: Quantitative Easing also weakens a country’s
currency, so foreign investors that own European
and/or Japanese equities would need to hedge
currencies in order to realize profits similar to those
in the chart above. Our current allocation contains
ETFs that employ these currency-hedging strategies.
Although it’s interesting to see the true power of
QE on risky assets, let’s shift focus on why the S&P
500 didn’t impress investors in the first quarter.
The answer to this question lies in investors’
expectations of future earnings, not current
earnings, and investors are worried about the
impact from three key forces: (1) falling oil prices,
(2) a stronger U.S. dollar, and (3) bad weather.
The net impact is that consensus believes that we
could see negative earnings growth for the first
half of the year.
While I tend to agree that each of these will
certainly weigh on short-term earnings, here’s why
long-term investors should ignore this rhetoric:
1. Oil Prices: The 50% drop in oil prices is
certainly disrupting equity prices, but the
long-term benefits of cheap oil to our economy
are exponential. Energy prices have not fallen
due to weak global demand. Rather, they have
fallen due to the technological advancements
here in the U.S. that have unlocked vast
supplies. It’s a classic case of “short-term
pain for long-term gain.”
2. The U.S. Dollar: A stronger dollar makes
our exports less attractive but we are NOT
an export-driven economy. Sure there will
be some weakness in earnings due to the
impact of the dollar, but currency issues are
temporary and not indicative of fundamental
flaws. As in, a strong/weak currency does not
alter Apple’s ability to innovate and create lifechanging products!
3. Bad Weather: Our economy is 70% consumer
spending so when we are inside freezing
instead of buying goods and services, our GDP
will suffer. However, weather is short-lived
and instills no long-term change in spending
habits. In fact, I would even argue that bad
weather merely postpones purchases instead
of canceling them.
Rest assured that I am no “perma-bull” on U.S.
stocks, where all bad news is really good news
because our economy is growing like a weed.
Quite the contrary, I don’t expect our economy
to grow any faster than 2.5% this year or next,
which translates to mid-to-high single digit annual
estimated returns from the broader U.S. equity
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • [email protected]
QUARTER 1 2015 MARKET REVIEW & OUTLOOK
market. However, multiple years of such returns in
equities combined with the power of compounding
translates into big profits over the long run.
The bottom line is that the days of big S&P 500
annual returns are most likely over now that QE is
a distant memory (for now). Earnings are now in
the driver’s seat, so expect to see much smaller
gains on an annual basis than we’ve seen since
2012.
Sincerely,
Mike Sorrentino, CFA
Chief Strategist,
Aviance Capital Management
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • [email protected]