Looking back on 2014, there were several unexpected events such as interest rates not rising as expected and the polar vortex. The US housing market was also softer than anticipated and the global economy slowed more than expected. Additionally, the large decline in oil prices surprised many. Looking forward to 2015, the US economy is projected to have continued growth. Interest rates are expected to rise gently, and oil prices are predicted to increase from current levels. The global economy is also forecasted to stabilize. Some whimsical predictions were also made about the NCAA tournament and Super Bowl having unexpected outcomes.

1. Looking Forward/Looking Back
Looking Back
2014 was year of surprises. There were several unexpected events that did happen and several expected events that didn’t
happen. These were our top five surprises of the year:
1. Interest Rates Did Not Rise. 2014 began with the 10 year Treasury yielding 3.04% and an expectation that that yield
would gently rise during the year. Other surprises, including geopolitical tension and disappointing global economics,
led to greater demand for the 10 year and as 2014 came to a close, its yield stood at 2.15%, far below expectations.
2. Polar Vortex Before 2014 we had never heard of the term ‘Polar Vortex’. During January and February we felt it. Parts
of the US were so cold that the entire economy was affected. The cold contributed to a GDP for the first quarter of the
year that contracted by 2.1%.
3. US Housing was Soft Fundamentals supported a strong housing sector but the sector remained in first gear; improving
but at a slow pace.
4. Global Slowdown 2014 began with an optimistic outlook for the global economic environment. By mid year it became
apparent that (1) the Eurozone was in danger of falling into another recession, (2) China was slowing more than
expected, affecting Asia first and foremost, then Europe and (3) Japan was far more fragile than had been thought.
5. Oil Prices The decline of the price of a barrel of oil from $107 in June to $50 or so by year end had to have caught
everyone by surprise.
Looking Forward
1. The US Economy remains in mid cycle form and could generate
a surprisingly good result. Projections of 2-2.5% could prove to
be too low.
2. Interest rates will gently rise. The Federal Reserve (the Fed) will
most likely raise short term rates in mid to late 2015 and longer
rates should follow, gently. The most important driver is likely to
be our improving economy.
3. Oil prices will be higher this time next year. We believe the
dominant factor in the price decline is oversupply. Oversupply
is a far easier challenge to meet than a shortfall in demand.
Drillers simply need to drill less. Producers, like the Organization of Petroleum Exporting Countries (OPEC) simply
need to curtail production, and not by much.
4. The global economy will come back from the precipice. The declining Euro and some quantitative easing can help the
Eurozone stabilize. China’s economy will continue to gradually slow, but according to expectations. Japan may benefit
enough from lower energy prices to finally turn the corner.
5. Real estate investment trusts (REITs) could have another good year. Valuations are fair and the prospects for
residential and commercial real estate are promising.
Our team recently met to discuss possible surprises and the impact they could have on our asset allocation advice.
Imaginable surprises, like still lower oil prices or a still higher dollar seemed to be manageable. Diversification means that at
least one of our assets is moving in a different direction than the others at most times and the diversification inherent in our
asset allocation advice could do okay in many scenarios. We would like to close by sharing a couple of whimsical projections
we imagined:
Coach John Calipari will recognize that his University of Kentucky men’s basketball team is a prohibitive favorite to win
the NCAA tournament in a walk. He will grudgingly agree to split his team into two, the Blue and White teams as NCAA
tournament starts. Amazingly the Blue and White teams will meet in the Final game.
With no team in the Super Bowl from the old NFL, and with the New England Patriots one of the combatants, the Super
Bowl effect will be negative. Markets will prepare for some ball and price deflation.
If you have questions regarding this weeks ‘Under the Hood,’ contact Chief Investment Officer, Mike Weiner.
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