In 2014, the place to be for investors was in large-company U.S. stocks. Investors in U.S. securities benefited from substantial economic traction especially during the second half of 2014, resulting in domestic stocks posting excellent returns even as the Federal Reserve wound down its quantitative easing program (massive bond-market purchases).
For the sixth year in a row, the Dow advanced. The Dow was up 7.5% for 2014. The S&P 500 gained 11.4%, led by a 24% return in utility shares and a 23% rise in health-care stocks. Including dividends, the S&P increased 13.7%.
But it was (and continues to be) a far different story overseas. Japan slipped back into recession, and European economic growth was anemic. China’s economy, the second biggest in the world, downshifted from a breakneck expansion pace.
The MSCI Europe Index lost 8.6% and the MSCI emerging-markets index fell 4.6%.
Bond yields fall when prices increase. In many markets, government bond yields declined during 2014. Reflecting strong growth in the U.S. and in anticipation of rate hikes by the Fed, the U.S. dollar jumped dramatically to multi-year highs against the Euro and the Yen.
In June, oil prices shot up to nearly $107 per barrel amid conflict in Ukraine and the Middle East, only to fall by more than 50% by year end. Hit by excess supply and slowing global demand, oil prices plunged in the last six months of 2014. And, continued to drop in early 2015.
Looking back, 2014 was a year of many themes that weren’t. With 10-year Treasuries at 3.03% at the end of 2013, markets were poised for even lower returns amid investor expectations that a continued rise in rates, in conjunction with the Fed tapering monetary policy, would take a bite out of fixed income securities; instead bond markets posted robust returns and rode rates all the way down to pre-taper levels.
A rally in equities lasting nearly 5 years and a GDP contraction in the first quarter of 2014 were reason enough to express caution around U.S. markets. That said, successive quarters of stronger-than-expected growth quickly eased these fears and drove U.S. stocks to continue their winning streak. Even the Fed’s planned wind-down of its bond purchases mostly went off without a hitch when the very idea of tapering caused havoc in markets only a year earlier.
With its best 3-year returns since the mid-90s, the U.S. remains the bright spot in world financial markets, but it faces considerable headwinds in 2015. Among the headwinds: A stronger dollar and lofty valuations of U.S. stocks. Also, the Fed tapering and then ending altogether the bond-market purchases it employed to stimulate markets and which drove U.S. stock valuations higher will serve to moderate future stock performance.
All these market movements serve as a present reminder to be sure to diversify portfolios and balance them with long-term personal investment objectives so as to not get tripped up by short-lived trends or market expectations. It is important for individual investors to keep faith their own personal investment objectives. Despite what we project to be a lower return environment going forward, we believe there are a number of investment opportunities to either seek returns or to reduce risk, such as oil companies beaten down by lower fuel prices and stocks poised to benefit from consumers having more money in their pockets due to lower fuel prices.Donald L. Orchard, M.S., J.D. is the President, Chief Executive Officer & General Counsel for UPAL and a Registered Investment Advisor Representative