Investment Year in Review 2014

by Jan 20, 2015Investment Consulting

Market volatility increased sharply early in the fourth quarter amid renewed concerns about deteriorating global economic growth prospects. These concerns were then highlighted when the International Monetary Fund downgraded its outlook for global economic growth, citing persistent weakness in the Eurozone and a broad slowdown in several major emerging markets.

Sentiment, however, quickly turned following comments on October 16 from the Federal Reserve’s James Bullard who indicated that monetary easing from the Federal Reserve may continue beyond October. This interesting turn of events made it clear that central bank activity is still a major factor in stock price appreciation.

Major asset class returns.

  

Q4

2014

Core Bonds

(BarCap U.S. Agg)

1.8%

6.0%

U.S. Dollar Index

(Trade Weighted)

5.0%

11.7%

Global Stocks (as a whole)

(MSCI AC World)

0.4%

4.2%

U.S. Large Stocks

(S&P 500)

4.9%

13.7%

U.S. Mid Stocks

(S&P Midcap)

6.3%

9.8%

U.S. Small Stocks

(S&P Smallcap)

9.8%

5.8%

Foreign Developed Stocks

(MSCI EAFE)

-3.6%

-4.9%

Emerging Market Stocks

(MSCI EM)

-4.5%

-2.2%

Commodities

(DJ UBS Comm)

-12.1%

-17.0%

Real Estate

(Wilshire Global REIT)

10.2%

20.4%

Interest rates domestically and abroad.

In contrast to the rising domestic interest rates that led to losses for most bond investors in 2013, falling interest rates led to gains in 2014. During the two-year period, returns differed substantially depending on term structure of the bonds held. Short term bond returns were .3% and 1.7% for 2013 and 2014, while longer term bonds experienced returns of -8.6% and 17.7% respectively.

In addition to the U.S., foreign interest rates fell substantially in the developed world partially due to a combination of low levels of inflation and continued monetary easing from central banks. Noteworthy examples include Germany and Japan where 10-year government bond yields fell from 1.94% to .54% and from .74% to .37%, respectively.

Labor market update.

The pace of job growth accelerated during 2014 to nearly 250,000 new jobs per month. In total, the U.S. economy has now added more than 10.6 million jobs since the beginning of 2010, far outpacing the jobs lost during the 2008 to 2009 timeframe. In addition, the unemployment rate has fallen from 10% in October of 2009 to the current level of 5.6%.

While monthly job gains and unemployment statistics were positive in 2014, there are other aspects of the labor market that are less than ideal. Today, only 62.7 out of every 100 potential workers are employed or looking for a job, down from 67.3 at the turn of the century. As such, a smaller percentage of the population is responsible for growing the economy than just a few short years ago. Also, wages, when adjusted for inflation, have changed little in the past 10 years making it difficult for the average worker to get ahead.

Central bank activity.

While the U.S. Federal Reserve concluded its asset purchase program in October and is now contemplating an interest rate hike in 2015, the European and Japanese Central Banks are moving in the opposite direction. The Bank of Japan continues to aggressively purchase bonds and the European Central Bank is now just beginning the process. These unprecedented programs, which are designed to help lower interest rates and spur economic growth, have led to combined central bank balance sheets that now exceed $10 trillion.

Oil production and prices.

The latest estimates indicate that domestic oil production has increased more than 20% in the past few years. With demand for oil relatively unchanged, prices began to adjust to the supply and demand imbalance in the second half of 2014. Oil fell from $115 in June to $55 at year end. The price decline accelerated in the fourth quarter when OPEC members failed to reach an agreement to cut production and Saudi Arabia reiterated its intention to keep producing at current levels.

While the developed world as a whole will likely benefit from reduced energy costs, the benefits are mixed for the U.S. Over the past few years the domestic oil boom has been a significant contributor to job creation as well as economic growth and will likely suffer from reduced oil prices.