Taking Stock

For this week’s Market Commentary, we are taking an excerpt from our 1Q edition of The Farr View. We hope you will find this brief summary of our current mindset both interesting and informative. For further information, and to see the entirety of the Farr View, please visit FarrMiller.com/farrview-newsletter.

It wasn’t an easy quarter, but it wasn’t a bad quarter. Stocks were twice as volatile as they were last year, and they edged a bit higher (about 1%). The dollar rose and bonds continued strong with the yield on the 10-year Treasury remaining below 2%.

The Federal Reserve jaw-boned about strong economic conditions that the data didn’t support, but the central bank seems to be wavering on any imminent rate hikes. Markets continued to hang on every word from everyone associated with the Fed, and we continue to fret that they may have already overplayed their hand. The music plays on, and markets are hanging tough. We are keeping close to an empty chair for when it stops.

Notwithstanding the widespread economic optimism at the beginning of the year (which is becoming an annual tradition), we stay committed to our belief that economic growth will remain stuck in the 2.0%-2.5% range. The thorn in our side remains the massive amount of stimulus that has been required to achieve the lackluster growth we’ve enjoyed since the recession’s end in 2009. The economy has benefited from a slew of stimulants, many of which could slow or reverse in the years to come.

  1. Among these stimulants are:
  2. A doubling in federal government debt;
  3. A $3.5 trillion increase in the Fed’s balance sheet;
  4. A 200%+ increase in stock prices;
  5. A drop in the consumer savings rate to around 5% from the long- term average of about 8.8%;
  6. Government guarantees on the overwhelming majority of new mortgages;
  7. A 50% drop in long- term interest rates; and
  8. A massive drop in energy prices.

In the absence of greater fiscal stimulus from a dysfunctional Congress, we believe that our growth potential could be capped for a while as the potency of these stimulants diminishes.

Over the near term, economic growth in the first quarter of 2015 (and possibly the full year) will almost certainly be a disappointment. Whereas last year’s first-quarter weakness was largely attributed to inclement weather, this year’s weakness is stemming from additional issues that may not be as “transient” as the weather. Most notably, these issues include a marked strengthening in the dollar, big decreases in energy prices, and continued economic weakness outside the US.