First Quarter 2015

Review and Outlook

Stocks, by and large, made little progress in the first quarter of 2015. High valuations and difficult year-over-year earnings comparisons largely served to contain the advance in share prices. Making matters worse, the weak economic conditions that prevailed in late 2014 spilled over into the early going of this year. A number of variables can be named as culprits for the economic weakness.

Anemic growth in advanced economies (particularly Europe and Japan) and a strong U.S. dollar reducing export competitiveness are two examples. The sharp decline in energy prices was another. In days gone by a pronounced decline in oil prices was a panacea for the U.S. economy, serving as a de facto tax cut. Today, however, with so much of our industrial capacity tied to energy production, falling oil has actually crimped GDP growth.

Concerns that the Federal Reserve might raise short-term interest rates further also weighed on stocks in the quarter. Those reservations waned as the quarter progressed, however, as the lagging economic data pointed to a continued slowdown, which takes the pressure off of the Fed to hike rates. Moreover, the economy does not appear to be in danger of sliding into recession, and indeed should actually pick up slightly in the coming months.

Just as weak oil prices contributed to the economic slowdown, higher prices—at least to a degree—could actually be beneficial to U.S. growth. Although we suspect a strong rebound in production from shale oil formations will be slow to materialize and that GDP by year’s end will remain muted.

Of course we’re mindful of the fact that things can go bad much faster than they improve. We see need to be vigilant in the event of, say, contagion results from Greece being forced from the EMU or oil prices moving significantly higher, in which case the economy and stocks alike could be once more headed for trouble.

But for now, the downside risk to the market appears limited. Most of our companies, meanwhile, are generating solid operating results. Strong cash flows and attractive valuations relative to both the market and their expected growth rates should, we believe, result in favorable relative returns regardless of market conditions.

Please click here for more details on our various investment strategies.