There are a lot of misconceptions about the state of the financial market. As volatile as 2014 was in the market, most of the markets finished in positive territory. In fact, 2014 was a good year for the U.S. economy and financial assets. Stocks and bonds both posted positive returns. Listed below are the calendar year returns for the major indices:
|Barclays U.S. Agg
|S&P Midcap 400
|MSCI U.S. REIT
Economic growth in the United States can be attributed to strong consumer spending, consumer sentiment that is at post-recession highs, a falling unemployment rate, improving vehicle sales and a housing market that is slowly recovering.
Slow growth overseas and a strengthening U.S. dollar largely kept international stocks in negative territory. In addition, a 40 percent drop in oil prices in the second half of 2014 negatively impacted the commodity markets. This has adversely affected oil exporting countries such as Russia and Venezuela, but has been beneficial for oil importing countries such as France, Germany, Japan and China. Low oil prices which have translated into lower gas prices in the United States will likely help boost consumer discretionary spending, which comprises approximately 2/3 of our gross domestic product.
With the 2015 outlook fairly positive for the U.S., it is likely that the Federal Reserve will raise rates sometime in the middle of the year. We have already seen a lot of volatility in the markets and anticipate more as the year unfolds. We are mindful of not allowing daily fluctuations in the markets to cloud our long-term investment philosophy.
Old North State Trust’s Asset Allocation:
- Within Fixed Income, we have continued to overweight short duration bonds but we have allocated a portion of that sector to the multi-sector bond space. Our multi-sector bond fund was up just under 5 percent for the year and generates a yield of just over 4 percent. We believe that this fund will be able to outperform as rates rise due to its ability to shift allocations across all fixed income sectors. We continue to maintain a position in floating rate bonds of around 3 percent. Our floating rate fund returned just under 1 percent for the year with a yield of almost 5 percent. In addition, we hold approximately 3 percent to 5 percent in a convertible fund which offers some of the capital appreciation potential of stocks while also supplying some of the safety and yield of bonds. Our fund was up just over 4 percent for the year with a yield just above 2 percent.
- Within the Equity space, we have maintained our allocations to large, mid and small cap. We started a position in the Frontier Funds to capitalize on the growth in these areas. Our fund was up 3 percent for the year. Also, in the international space, we will start a position in a U.S. dollar-hedged exchange traded fund. We anticipate that this will give us a buffer to currency swings in the near-term as the dollar is expected continue to rise in value versus the Euro.
- In the commodity space, we sold our natural resources fund and purchased a MLP Energy Infrastructure Fund. This fund took a big hit in the second half of the year due to the drop in oil prices, but still finished the year up 8.5 percent. We anticipate volatility in this space in the near term, but feel there is a lot of long-term upside potential to be gained.
If you have any questions about the information in this commentary, please contact Old North State Trust.
Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call