March 2015

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The title of our Annual Symposium last month was “How I Learned to Stop Worrying and Love…Low Oil Prices, Low Interest Rates, and a Strong Dollar.” We remain steadfast in our belief that each of these factors will be a positive for our economy in 2015 and beyond.  We do recognize that volatility in the financial markets has risen in the first quarter of 2015 and will continue to be a point of stress in the financial markets for much of 2015.

Low Oil Prices

While market participants continue to debate the causes, effects, merits, and risks of low oil prices, we maintain the view that sustained low energy prices will provide a boost to domestic economic growth.  Energy costs are a larger relative percentage of household expenses for low and middle income families, and, for the first time since the Great Recession, this segment of our population has the opportunity to enjoy a windfall. A quick rebound in energy prices will not produce the desired effect in terms of consumption.  However, energy prices that are sustained at a lower relative level should, over time, boost consumption by a significant margin.  The current oversupply of oil favors a longer period of lower oil prices.

Low Interest Rates

Monetary policy measures for the past seven years have been focused on stabilizing an economy that continued to suffer aftershocks from the financial crisis.  These emergency measures have kept interest rates very low while restoring household wealth and boosting asset values.  Recent U.S. economic strength has provided comfort to the Federal Reserve to follow through on a shift in monetary policy.  For the first time since 2004, the Federal Reserve will begin to increase rates, and many expect the first increase will be in June of this year.  The Federal Reserve’s announcement will essentially be a declaration that emergency measures are no longer necessary.  This represents an acknowledgement that our economy has reached a point of self-sustaining growth.  Interestingly, the Federal Reserve in its most recent pronouncements, reduced its expectations for future rate increases, supporting our long held view that rates will remain low for longer.

A Strong Dollar

For the first time since 2008, global monetary policy is diverging.  While the U.S. is prepared to raise rates, the European Central Bank (ECB), the Bank of Japan and many others are lowering their policy rates.  This divergence has spurred a pronounced shift in the foreign exchange markets as the Dollar has strengthened sharply against most foreign currencies.  A strong Dollar will suppress inflation, and it will facilitate U.S. consumption as purchasing power for imported goods rises considerably.  A strong Dollar will also contribute to sustained lower energy prices and lower relative interest rates.  U.S. Treasury rates remain historically low, but they are quite attractive when compared with yields available on other sovereign debt, some of which are now negative.  While the strengthening Dollar will act as a headwind for certain types of companies, we believe the U.S. Economy as a whole will benefit.  Given a likely multi-year cycle of monetary policy divergence, we anticipate portfolio adjustments will be necessary to capture some of this currency impact.

Influencing the Federal Reserve’s willingness to gradually reverse policy direction is the visible improvement in our labor market.  Net job creation in 2014 was the best since 1999, and we anticipate that the improving labor market in combination with low inflation will eventually result in meaningful real wage growth.  As this economic process unfolds, we are convinced the financial markets will well tolerate the modest reversal in Federal Reserve policy.

Early in this transmittal letter, we gave recognition to the heightened volatility in the equity markets.  Over the short term, we expect the economic data, combined with first quarter earnings reports, will send conflicting signals.  This will likely lead to continued volatility in our financial markets.  Volatility can offer opportunity, provided underlying fundamentals remain intact.  In our assessment, economic and market fundamentals remain sound, with the possibility of an acceleration in economic performance as 2015 unfolds from the tailwind of sustained low energy prices.