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Wealth Management
8521 E 21st North
Wichita, KS 67206
tel 316 383 8300
fax 316 383 8320
July 16, 2014
The first half of 2014 is complete and it has been a remarkably calm march higher for
almost every asset class. There were very few asset classes or countries which didn’t
appreciate during the first six months.1
Table 1 below shows the returns for the major asset classes for both the 2nd quarter and
year-to-date. Except for commodities, Q2 returns were very strong across the board.
Table 1: Asset Class Returns
S&P 500
Developed Int'l Stocks
Emerging Mkt Stocks
2014
2nd Qtr YTD
5.2%
7.1%
4.3%
5.1%
6.7%
6.3%
Investment Grade Bonds
Municipal Bonds
High Yield Bonds
2.0%
2.5%
3.0%
3.9%
5.7%
6.1%
Commodities
0.1%
7.1%
Source: JP Morgan Guide to the Markets - 6/30/2014
“The only function of economic forecasting is to make astrology look respectable.”
Ezra Solomon
At the end of 2013, most strategists and economists agreed on two points, (1) the
economy would experience accelerating growth in 2014 and (2) with the improved
economy we would see interest rates rise.
As the table below shows, the economy during Q1 2014 had its largest contraction ever
outside of a recession since 1947.2 As you may recall, the weather last winter was very
challenging and it does appear that Q2 has bounced back nicely. Still, it is unusual for a
healthy, vibrant economy to suffer such a significant contraction because it was cold and
1
Russia was down 5.2% in USD terms and China was down 0.5%. Also, there were some sophisticated
hedge funds which were down 1% - 10% depending on the strategy.
2
We hope it is outside of a recession!
it snowed. Perhaps after the government gnomes recalculate the data, the contraction will
be revised.
Largest U.S. GDP Contractions in History
Rank
GDP (ann)
Date
Recession
1
-10.4%
1Q 1958
Yes
2
-8.6%
4Q 2008
Yes
3
-8.1%
2Q 1980
Yes
4
-6.7%
1Q 1982
Yes
5
-6.1%
4Q 1953
Yes
6
-5.6%
1Q 2009
Yes
7
-5.5%
1Q 1949
Yes
8
-4.8%
4Q 1960
Yes
9
-4.8%
1Q 1975
Yes
10
-4.7%
4Q 1981
Yes
11
-4.1%
4Q 1970
Yes
12
-4.1%
4Q 1957
Yes
13
-3.9%
3Q 1974
Yes
14
-3.6%
4Q 1949
Yes
15
-3.4%
4Q 1990
Yes
16
-3.3%
1Q 1974
Yes
17
-3.0%
1Q 2014
No
18
-2.9%
2Q 1981
Yes
It appears that the Q1 decline was almost entirely
due to demand factors (it’s hard to buy a new car
when you can’t get out of your house) while the
supply side of the economy, primarily employment,
has been performing fairly well. The most recent
unemployment rate for June was 6.1%. As recently
as September of last year the Fed was forecasting an
unemployment rate of between 6.4% - 6.8% for
20143.
It appears the economy is functioning well and the
end of extraordinary monetary policy is nearing.
The Fed Funds rate has been set at 0.25% since
December 2008 which is the longest period of time
that the rate has been held steady over the past 50
years.
As for long-term interest rates, the biggest surprise
for many investors this year has been the strong rally
19
-2.7%
1Q 2008
Yes
in the bond market driving yields down. This is not
20
-2.3%
3Q 1953
Yes
just confined to the United States. The chart below
Source: J. Lyons Fund Management, Inc.
shows the current 10 year yields for several countries
some of which are borrowing at rates below Uncle Sam.
3
Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents,
September 2013
It seems odd that Spain can borrow 10-year money for nearly the same cost as the US.
As recently as July 2012, Spain was paying 5.0% above the US due to its economic
problems. Investors were probably too pessimistic in July 2012 and are likely too
optimistic in July 2014.
We continue to believe that conservative positioning in investment portfolios is the most
prudent course given the strong returns we have experienced over the past five years and
the near certainty that the Fed will begin raising interest rates at some point in the next 18
months.
Thanks for your continued confidence and support. Please call us with any questions.
The Kirk, Bahm Group at Morgan Stanley
www.morganstanleyfa.com/thekirkbahmgroup
8521 E 21st St North
Wichita, KS 67206
316-383-8300
Steve Bahm
Senior Vice President – Wealth Advisor
Tom Kirk
Senior Vice President – Wealth Advisor
Margaret Dechant, CFP®
Senior Vice President – Wealth Advisor
Andrew Mies, CFA®
Portfolio Management Director
Senior Vice President – Wealth Advisor
Bryan Green
Senior Vice President – Wealth Advisor
Pam Smith, CRPC®
Vice President – Wealth Advisor
Sarah Hampton
Associate Vice President- Wealth Advisor
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any trading strategy.
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