Market Commentary: Market Recap
Market Update for the Quarter Ending December 31, 2014
Another strong year for U.S. markets
For the second year in a row, U.S. markets were the place to be, closing 2014 with a very strong fourth quarter despite a weak December. The Dow Jones Industrial Average was up 0.12 percent in December but a much stronger 5.20 percent for the quarter. The S&P 500 Index was down 0.25 percent in December but posted a 4.93–percent gain for the quarter. The Nasdaq lost 1.16 percent for the month, though it gained 5.40 percent during the quarter.
Gains for the year were widespread, with the Dow and Nasdaq up 10.04 percent and 13.40 percent, respectively. The S&P 500 did best, gaining 13.69 percent for the year.
U.S. economic growth accelerated, with the most recent report on gross domestic product (GDP) growth announcing a 5–percent gain for the third quarter. Corporate revenues and earnings also increased.
An increase in market valuation levels supported share price gains. At year–end, U.S. markets were at or close to all–time highs, and technical factors remained strong.
International markets underperformed U.S. markets over the month, quarter, and year. The MSCI EAFE Index, representing developed international markets, was down 3.46 percent for December and 3.57 percent for the quarter. The MSCI Emerging Markets Index did worse, declining 4.82 percent in December and 4.88 percent for the fourth quarter.
For the year, developed markets were down 4.90 percent, and emerging markets dropped 4.63 percent. Technical factors were soft, with both indices well below their 200–day moving averages.
The Barclays Capital Aggregate Bond Index was up 0.10 percent for December and 1.79 percent for the fourth quarter, contributing to a 5.97–percent gain for the year. This strong performance was driven by a consistent, and unexpected, decline in interest rates throughout 2014. Rates on the benchmark 10–year U.S. Treasury bond declined from 3 percent to 2.17 percent during the year, largely driven by uncertainty elsewhere in the world.
Economic recovery hits escape velocity
The major economic story for the fourth quarter was the Fed’s decision, driven by ongoing economic improvement, to stop buying bonds, signaling that, in its judgment, the economy didn’t need the support. In fact, by year–end, the U.S. recovery was moving from strength to strength. The 5–percent third–quarter GDP number was the strongest since 2003. Moreover, as our chart shows, there has been a consistent increase in GDP in recent years.
The increased growth has been driven by a substantial improvement in employment. November’s jobs report showed that total jobs had increased by 321,000. Moreover, through the first 11 months of 2014, the economy had added 2,549,000 jobs, the highest level since 2000.
Low oil prices surprise the world
Continued economic growth seems even more likely, given the recent crash in the price of oil.
Declines in oil prices act as economic stimulus, with lower gasoline prices putting more money in the pockets of consumers, which then gets spent on other things, helping growth. Lower energy prices also benefit companies, in the form of lower operating costs, which helps profit margins and potentially stock prices.
U.S. picture good, but risks remain
For the U.S. economy, 2015 seems to be getting underway on a positive note, but risks remain.
Europe and Japan remain at risk economically. And, although China’s growth is strong, its rising debt has forced the government to continue stimulus, suggesting some risk. Perhaps most worrisome, Russia ended 2014 in economic crisis.
Here in the U.S., despite strong economic and corporate fundamentals, stock market valuations are very high. The potential for earnings downgrades due to the strong dollar and poor results from the energy sector is real, even though expected earnings growth has already been downgraded for 2015.
Still, we are in a better place than we were in early 2014. The U.S. economy is solid, the trends are good, and we are well positioned to overcome any challenges. As always, a long–term perspective and diversified portfolio are the best ways to take advantage of opportunities and overcome risks.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward–looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward–looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price–weighted average of 30 actively traded blue–chip stocks. The S&P 500 Index is a broad–based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Barclays Capital Aggregate Bond Index is an unmanaged market value–weighted index representing securities that are SEC–registered, taxable, and dollar–denominated. It covers the U.S. investment–grade fixed–rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage–backed pass–through securities, and asset–backed securities. The MSCI EAFE Index is a float–adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization–weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.