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December Commentary

Quarter Review

The 4th quarter of 2014 has been considerably more volatile than those of the past few years, as we have seen a see saw effect on a swell of global economic data and events. The quarter thus far has seen the S&P 500 fluctuate up and down by 5% or more a number of times.

The most recent dramatic move was an upswing on an early Christmas present by the Federal Reserve. During their mid-December meeting, they almost guaranteed interest rate hikes were multiple quarters away. That present, amongst other comments, were all investors needed to reverse the harsh sell-offs recently.

For the few weeks prior, Russia and the free-fall drop in oil prices provided some market jitters. I had many clients ask “isn’t it a good thing for the economy if the price of oil drops”? My quick answer is “well, yes”. So why then were the equity markets dropping in step with oil prices? The answer is based on perception. Historically, a drop in oil prices is due to a drop in demand, which could be perceived as a drop in global production and a slowing global economy. It was that scenario that led to the initial reaction of the market to sell-off. When the Federal Reserve commented they believed the oil price decline was not based on demand, it eased fears of a global economic slowdown and created a catalyst for an intense rally.

Forward Expectations

Looking forward, we still see a positive environment for US equities as there seems to be a dispersion between the health of the US economy vs that of the rest of the world. A continuing theme of a low-interest rate environment maintains the attractiveness of equities, especially those that pay a dividend as they can be seen as fixed income replacements. The dovish comments by the Federal Reserve have increased the likelihood of a Santa Claus rally into the end of 2014.

Model Allocation

For equities, we still think the US will do well, and favor the small cap sector if economic data continues to improve. In addition, dividend paying companies should perform well as investors seek yield they cannot find in bonds. For our fixed income portion, during the quarter we reduced allocations to lower quality fixed income due to valuation concerns and issues with the energy sector. We also reduced our commodity allocation in the quarter due to lack of inflation. Although not a large portion of our allocations, the early call in reducing our percentage allocation in commodities helped buffer the pullback in the sector due to the decline in oil prices.


As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.

Jason M. Vavra, CPA, PFS



Twitter: @VavCap


The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.