“While the storm clouds gather far across the sea, Let us swear allegiance to a land that’s free…”

– from God Bless America, by Irving Berlin.

The last quarter of 2014 featured continued volatility in the financial markets, though within an upward trend. Major themes included plunging oil prices, the strength of the U. S. dollar and also in longer maturity developed nation sovereign bonds. After swooning 5% in early October, domestic equities rose more than 11% into yearend, led by consumer and healthcare stocks, but the energy and materials sectors fell considerably. Foreign markets also were mixed, with developed and consumer based markets outperforming emerging and natural resource based ones.

As 2015, the economic expansion in the U. S. remains fairly steady. Employment gains are strong, and there are early signs of wage increases. Although energy companies are beginning to suffer, America remains a net oil consumer, and the fall in gasoline prices provides consumers with the equivalent of a massive tax cut. Foreign economies are mixed. The Eurozone remains sluggish and Greece has re-emerged as a trouble spot, though it is not a systemic risk to Europe any more, as policymakers and bankers have had time to minimize a “Grexit” or exit from the European Union. The European Central Bank is expected to announce a quantitative easing program to stimulate the regional economy very soon. In Asia and as a result of the recent election in Japan, Prime Minister Abe now has a mandate to push through more reforms to revive the nation’s economy, and that should help lift Japanese equities. The UK market may be on hold until after general elections due midyear. And, prospects for emerging economies vary greatly, with natural resource based economies such as Brazil and Russia likely to fare poorly with oil importers such as India receiving a big economic tailwind.January 2015

The outlook for energy prices looms large. There are various theories for the recent dive in oil prices, with some contending that it was a function of a weak global economy, with others saying it was caused by Saudi Arabia hoping to regain market share by squeezing marginal cost suppliers. Most likely it was both, with the supply argument being the stronger of the two factors. It is no secret that Persian Gulf producers see the fracking revolution here as a threat and are trying to prevent U. S. production from growing any further. Where petroleum prices bottom is anyone’s guess, but keep in mind that similar plunges occurred in both 1986 and 1998, and after some volatility the markets in the oil consuming nations eventually rallied sharply. As far as the effect of the oil price decline (so far)on economic growth is concerned, current “guesstimates” show a net boost to U. S. real GDP (Gross Domestic Product) growth of roughly one half of a percent.

The local economy in Hawaii may experience crosscurrents in 2015. Continued strength in the dollar may reduce foreign tourist arrivals. However, the threat of an Ebola epidemic has faded, and lower energy prices may reduce airfares. Local residents may also use some of the savings in gasoline prices to increase their retail spending. Overall, the outlook for the economy in Hawaii looks good.

We included the quote from God Bless America because it is appropriate as far as the U. S. dollar and investments are concerned. We continue to favor U. S. equities, as valuations are not stretched overall and the investment fundamentals for other asset classes such as bonds and commodities are not nearly as appealing. Foreign equities of choice remain developed nations, especially those that are oil importers.