Market Data for year-end 2014:

• S&P 500 Stock Index:  2059, up 11.3%
• Ten-year Treasury Note Yield:  2.17%, down 0.87%
• Gold:  $1,183 per ounce, down 1.6%
• Oil:  $54 per barrel, down 44.9%

In 2014, the US stock market enjoyed another year of double digit returns.  This was driven by two factors:  solid US economic growth and low interest rates.  Solid economic growth supports corporate profits, while low interest rates make stocks more attractive.  Low interest rates, in turn, had two driving factors:  Low inflation and weak global growth.   Low inflation is primarily the result of continued slack in the US economy following the financial crisis, while weak global growth anchors US interest rates relative to those of other leading economies such as Germany and Japan.

In commodities, gold struggled as inflation remained low and the US dollar strengthened.  Stronger US economic growth relative to the rest of the world drove the US dollar to multi-year highs versus global currencies virtually across the board.  Oil suffered a collapse in the second half of the year impelled by increased US production of oil from shale drilling and weak global demand.  Saudi Arabia, the one country capable of altering supply to support prices, chose not to, and the decline in oil prices accelerated.  We feel that low oil prices are a positive for the US and global economies.  While investment and employment in the US oil sector will suffer, America, Europe, Japan, and China are net consumers of oil, and low prices will support consumption and investment.

While this benign environment for stocks can persist, we can identify two primary risks to the stock market going forward.  First, continued above trend US economic growth could eliminate the slack in the economy, pushing inflation and interest rates higher.  This in turn, would pressure corporate profits and make stocks less attractive to interest bearing securities.  The US Federal Reserve is widely expected to begin gradually increasing overnight interest rates charged by banks for the first time in nine years starting in mid-2015.  If interest rate increases were to come sooner and progress faster than this expectation, stocks could be negatively impacted.

Secondly, the weakness in global economies could intensify, leading to financial instability and decimating US exports.  Europe is bordering on deflation, Russia is in the throws of a near financial crisis, Japan has fallen back into recession, and Chinese growth is at multi-decade lows.  While the US economy is the most self-sufficient in the world, it is not an island, and ultimately, international economic weakness and instability could negatively impact our own economy.  Furthermore, US corporations receive a large portion of their sales from overseas, so their profits are already coming under pressure.

While these are the primary risks we can identify, actual threats to the US economy and stocks are often impossible to forecast and come out of the blue.  Politics are a potential wildcard.  There is the possibility, albeit unlikely, for a severe selloff stemming from a threatened failure to raise the US Federal debt ceiling, as was the case in the summer of 2011.  We do not feel Republicans regaining the Senate will lead to de-escalation in partisan warfare, as some have suggested.  In Greece, an-anti Euro party may come into power threatening a Greek exit from the currency union, which would open up a Pandora’s Box of uncertainties.  US stock prices are at the upper end of what can be considered reasonable valuations, so are vulnerable to external shocks and adverse economic developments.  For 2015, we see the US stock market, as represented by the S&P 500 stock index, to trade in a range of 1900 to 2300.  It ended 2014 at 2059.

For the third year running, we are pleased to have been named a Five-Star Wealth Manager as described in Chicago Magazine.   Fewer than 3% of the 11,800 financial services professionals in the Chicago area are chosen.  A detailed description of the award can be found on page FS 1 of the November 2014 issue of Chicago Magazine.  More details are available at

Thank you for your continued confidence.  As always, do not hesitate to contact us with any questions or concerns.

Patrick Mauro, Daniel Mauro, Henry Criz

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