Dear Fellow Shareholders:

As the U.S. economic recovery approaches its sixth anniversary, prognosticators may be well-advised to borrow from the practice of medieval mapmakers. To depict areas beyond established frontiers, mapmakers drew colorful illustrations of dragons and other mythological creatures. The message was one of caution: No one knows what lies there. While today’s economic landscape may not be fraught with the perils of a months-long ocean voyage on a wind-powered vessel navigating in uncharted waters, the challenges facing investors are real and the outcomes, like the receptions of distant people, are far from certain.

To be sure, there are many positive signs. Over the past year, the pace of the economic recovery in the U.S. has held relatively steady, the unemployment rate has continued to fall as new jobs have been created at a healthy clip, and most financial markets have stayed at elevated levels.

At the same time, many economies around the globe are still struggling, short-term interest rates continue to hover near zero, the prices of various commodities have declined, energy prices in particular have plummeted, and the dollar has gained sharply against other world currencies. In numerous respects, the current situation is unlike that of any prior period. Similar to the explorers of old, we may be poised to discover whether there are dragons lurking beyond the horizon.


On the surface, the waters appear relatively calm and the wind is at our backs. Most financial markets have continued to hold their values or trend upward, and there is little to suggest that measures of market psychology have deteriorated. Similarly, economic data in the U.S. generally indicate that we’re still in a period of slow but steady growth.

The unemployment rate has resumed its decline and is now at 5.5 percent, down from a peak of 10 percent in October 2009 and reaching its lowest point since May 2008. At 62.7 percent, the civilian labor force participation rate is somewhat concerning as it sits near its 37-year low. And new job creation was disappointing in March. But for all of 2015, new jobs are expected to total more than 3 million, roughly the same as last year. All told, the improved employment picture is likely to result in slightly higher wages, which may slow the widening disparity in incomes between rich and poor.

Inflation is expected to remain low, given the huge assist from declining energy prices. While the Consumer Price Index will probably be higher than the sub-1 percent levels of the past few months, the rate is likely to stay below the U.S. Federal Reserve’s target of 2 percent. In addition, the housing market, despite recent weakness attributable to winter weather, is expected to finish the year strong with gains in housing starts, with the rising sales of existing homes and with a resurgence of first-time buyers.

The economies of Europe and Japan are more problematic despite ongoing monetary stimulus. The real gross domestic product (GDP) growth rate for the euro area, though improving, remained anemic at 0.9 percent in 2014 and is forecast to be just 1.3 percent this year. Japan’s economy seems impervious to significant change. Neither Abenomics nor a deliberate devaluation of the Japanese yen has had the desired effect. Originally forecast to grow at a 3.6 percent annual rate in the fourth quarter of 2014 after two consecutive quarters of decline, actual fourth-quarter GDP growth in Japan was only 2.2 percent. On the other hand, China’s GDP growth looks impressive by comparison. Although many investors were unnerved by the deceleration to 7.4 percent growth in 2014 from 7.7 percent in 2013, China remains one of the fastest-growing countries in the world.