July 2014 Monthly Outlook – ‘The Trick’ & Mid-Year review

The Trick

“ The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. “   Peter Bernstein

Benjamin Graham stated, “The essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept.”

I have studied the works of these two well-known investment professionals and endeavor to apply their principles to managing investments for my clients.

Mid-Year review

The first half of 2014 came with surprises few could have foreseen –  severe winter weather across much of the US, new geo-political conflicts in the Ukraine and Iraq, and perhaps most surprisingly a decline in interest rates.  Despite these surprises, the financial markets held up reasonably well.  In fact, for the first time since 1993, equities, bonds, house prices, and commodities all rose in unison in 1H of 2014 (source: ISI).

In my January 2014 Monthly Outlook I listed five major themes for 2014. Let’s see how I am doing so far:

July 2014 Mthly Outlook2

*PCE = personal consumption expenditure rate

** BEA = US Dept of Commerce Bureau of Economic Analysis

Other statistics from Yahoo Finance

Perhaps the biggest surprise of the 1st half of 2014 was the decline in interest rates.  I expect interest rates to start to increase in the 2nd half of the year based on stronger economic data.  Another surprise to me is the lack of volatility in the equity markets.  The largest pullbacks this year were 5.9% from Jan 21, 2014 thru Feb 3, 2014 and 4.0% from Apr 2, 2014 thru Apr 11, 2014 (basis S&P 500).  The S&P 500 has gone 52 consecutive trading days, dating back to 4/16/14, without a daily move (up or down) of greater than 1%. This lack of volatility is especially disconcerting given the existing geo-political events globally.  I came into 2014 expecting at least a 10% correction during the year.  I am still expecting a 10% correction in the equity markets over the next 6 months. Actually I am hoping for said correction as I feel it would be good for valuations and future gains. I also expect developed international equities, especially developed Europe, to perform better than US equities for the balance of the year.

Economically, I expect a return to slow but steady growth in the US economy.  There are no signs of a repeat of the summer economic slowdowns of the past 4 years as shown in the chart below.

July 2014 Mthly Outlook

courtesy: ISI

Based on this economic outlook, the continued monetary stimulus by the Fed, the ECB and the Bank of Japan, and improving confidence among consumers and business owners I anticipate a reasonably stable investment environment for the remainder of the year.  However, as we saw in the 1st of the year, unforeseen events can have significant impact and therefore a broadly diversified approach remains the logical way to invest.

I am adding a new “feature” to my monthly outlook –  a Calendar of Events –  please let me know what you think of it.

July Calendar of Events

July 4th                    Independence Day – enjoy your holiday!

July 11th                  My daughter Ryan’s 26th birthday – she ages off of my health insurance plan and gets to try out Healthcare.gov

July 25th                  Feast of St James  – being named James I had to put this on the list

July 27th                  Parents’ Day – My best to all the parents’ out there and for those of us lucky enough to have living parents, please let them know they are appreciated.

July 29th                  National Lasagna Day


As always, I appreciate the opportunity to be of service. I hope you find this report useful.  Please pass it on to anyone in your world who could benefit from it.

Sources: International Strategy & Investment,  Blackrock, Natixis Global Asset Management

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. 

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results. 

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Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.