Large Cap Commentary – December 2014
The year 2014 is officially in the books. I am unsure how historians will ultimately grade the year. From an “instant analysis” standpoint, 2014 was not bad. If you can recall the beginning of the year, you will remember that the majority of us were in the grips of a winter that felt as though it would never let down. As the mercury plunged in January, so did the stock market. This was a surprise coming off of a 30% + return year in 2013. Investors were left wondering when the markets would thaw just as people in the Midwest pondered similar thoughts about the weather. Thankfully, both eventually did.
We began 2014 with the yield on the 10-Year U.S. Treasury bond at 3.0%. Expectations were that the end of Quantitative Easing (QE), coupled with the tailwind of a strong economy, would push interest rates higher. That’s because in mid-2013 the mere talk of “tapering” pushed interest rates up. This was not, however, to be the case in 2014. We ended the year with the 10-Year Treasury yield at 2.2% after experiencing a precipitous drop in October, which took the yield below 2.0%. As we peer into 2015, expectations call for the Federal Reserve to move away from ZIRP, its zero interest rate policy by mid-year and raise Fed funds over 0% for the first time in five years. It will be interesting to see whether or not the Fed does act, and if so, how stock and bond markets react. Stay tuned.
Another surprise in 2014 was the price of oil. Only a lottery winner or a lunatic would have predicted that the price of oil would be below $50 per barrel from where we stood in July. However, that is where we find ourselves today. Wall Street earnings estimates for energy companies are being slashed as frequently as weather forecasts are being changed, and a bottom has yet to be found. In the meantime, we consumers are driving away from gas stations with something other than a receipt; we have change in our pockets. As consumers represent 70% of our economy, most economists believe this drop in the price of oil is actually a good change for the economy as a whole. Again…stay tuned.
Finally, when we evaluate the valuation of the market, we at Argent think we are closer to fair value than we have been in the past, but we are not there quite yet. This is similar to where we were at the end of 2013. In addition to the potential upward bias in valuations going forward, we have a domestic economy which is doing better-than-expected, with third quarter gross domestic product (GDP) growing at a robust 5% rate. How will stock prices change or our economy fair in 2015? Our answer….stay tuned.
From a great 2013 to a good 2014, we enter 2015 in pretty decent shape. There will certainly be surprises throughout the year and we at Argent shall certainly stay tuned. However, rest assured we will work diligently and apply our stress-tested, disciplined investment process to identify companies possessing favorable odds for the next three to five years.
As always, we appreciate your interest in Argent Capital Management.
Ken Crawford , Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Past performance is no guarantee of future results.