Chief Investment Officer, Patrick Jamin, provides commentary and insight on the 2014 market and what lies ahead in 2015. 

  1.     What is the outlook for 2015?

 

 

As we have seen in the past, “annual outlooks” from companies and analysts are simply estimations, best guesses, or even bold speculations with little merit or accuracy behind them. There are too many factors (and factors that WILL change) that alter the market landscape to predict how equities will perform over the course of an entire year. Rather than speculate on the future, we rely on quantitative data to obtain a market outlook and select which holdings are most appropriate in the short and medium term environment. Alternative scenarios can develop for the better or the worse. Thus, when building a portfolio, we take into account the most likely scenario but also the smaller probability of some more extreme scenarios. This process is updated daily as new information comes in and changes our outlook on the market or on any specific holding.

 

  2.     What is the current outlook for U.S. equities?

 

 

 

We are cautiously optimistic about large-cap U.S. equities for 2015 with U.S. economy began to expand at a more meaningful rate and consumer sentiment continues to improve.

 

  3.     What are the key macroeconomic factors guiding your investment process?

 

 

 
As job growth remains at the current underling pace – about 225,000 per month, unemployment and underemployment are falling fast.  The tightening labor market may have played a role in a 1% jump in labor income in November 2014, the strongest rise since 2006. Stronger wage growth will support consumer spending as long as the household saving rate is low.  We believe that the saving rate will likely decline with wealth effects powered by record stock prices and better housing value.
 

  4.     Are we experiencing growing confidence in the U.S. consumer?

 

 

 
Higher wages and low energy cost also boosted consumer sentiment.  According to University of Michigan, the consumer confidence index jumped to its highest level in more than eight years.  Even though the upward trend in confidence has been in place since late 2013, the past several months mark a sharp acceleration in improvement.

 

  5.     Is housing experiencing the same positive recovery as equities?

 

 

 

The U.S. housing market recovery has been disappointing so far, but we expect the situation to improve in 2015.  Tight mortgage credit combined with a previous jump in the mortgage rate crimped first-time home buyers, but this should change soon. Fannie Mae and Freddie Mac recently signaled a greater willingness to lend by lowering their minimum down payment requirement from 5% to 3%.  The National Association of Home Builder’s index has been rising this year, and now reached 57 in December, hovering near its highest level in nine years.

 

  6.     What are the current challenges or risks heading into 2015?

 

 

 

The Federal Reserve policy is the key treat to the economy in the coming year, namely, the chance that the Fed will begin to raise interest rates.  While the economy has improved, the U.S. economy is far from healthy.  Hence, we expect the Fed’s normalization of interest rate to occur slowly.  However, we also see the uptick in volatility as investors get nervous on the Fed action. 

The other risk of the U.S. economy is overseas.  Problems in Europe and China have the potential to hurt the U.S. market in 2015.  The eurozone is flirting with another recession, and its unemployment is very high.   China’s struggles to hit its economic growth targets pose another threat. 

 

  7.     What specifically draws concern for Europe?

 

 

 

Europe has not experienced the same recovery as the U.S. since the global recession over 6 years ago. Investment in Europe is low mainly because of weak demand.  The weakened demand is hampering growth and creating the risk of a deflation spiral. The Labor market revival has been slow.  Unemployment rates are expected to remain above 11%, and geopolitical risks stemming from the Russia – Ukraine conflict are curbing investment.   

  8.     With six consecutive years of positive equity performance, are we due for negative 2015?

 

 

 

As mentioned before, there is no way to know for sure. Overall, indicators point to a positive equity environment.  More importantly, this is the reason our tactical strategies use cash as a protection against down-side risk. Over the last six years, cash in the portfolios has been a drag on overall performance, as to be expected when equities rise and portions of the strategies are not taking part in the advances.

We view our cash scaling tactics similarly to the concept of insurance. You don’t want it until you need it.

 

  9.     Equities to the side for a moment, what were some positive elements with Fixed Income in 2014?

 

 

 

Medium and long-term duration holdings paid off. Yield is simply a proxy for risk. In 2014, the risk did not materialize and fixed income holdings advanced. Our own Tactical Income strategy rose 6.3%* for the year, outpacing U.S. Bonds (5.9%)* and Global Bonds (1.7%).* The Federal Reserve’s ‘dovish’ outlook helped in the fixed income environment.

 

  10.     What advice do you give to individual investors as we head in 2015?

 

 

 

As with any other year, or timely ‘checkpoints’, it’s important to remember investing comes with risk, and risk should be considered first and foremost in every decision. NorthCoast offers a variety of strategies with objectives ranging from ‘capital appreciation’ to ‘capital preservation, from ‘growth’ to ‘income’. Some are tactical in nature, some are strategically fully-invested.  Some use individual stocks, others invest with Exchange-Traded Funds (ETFs). However, the starting point for each strategy and the investment process within each strategy is the ‘risk’ associated with reach that objective. Our goal is to provide the best ‘risk-adjusted’ performance in any given environment.

If you have questions on any of our strategies, please consult with one of our professional investment advisors. Our team is here to help in any way possible.

 

Image source: Kemteck, Inc.