The U.S. stock market had a volatile fourth quarter of 2014, swooning almost 10% during the first half of October and getting hit hard again in the first half of December, with a powerful rally in between. Another rally going into the holidays lifted the S&P to a gain of 5% for the quarter. For the full year the S&P rose 13.7% and the Dow Jones Industrial Average was up 10%.
International stocks as measured by the MSCI ACWI (ex U.S.) Index did much worse, falling 5%. It marked the second straight year of meaningful divergence between performance of international stocks and U.S. stocks. The MSCI All County World Index (ex U.S.) is a measure of international markets including major developed countries such as Great Britain, Japan and Europe. Emerging Markets, which includes only the less mature up and coming markets such as India, China, Turkey and Mexico were off 4% for the fourth quarter and down 2.5% for the full year.
The Federal Reserve kept short-term interest rates at their extremely low levels throughout the fourth quarter and the entire year. As a result, yields on cash and Certificates of Deposit remained at very low levels.
Quantitative Easing (QE) 3, the direct purchase of bonds on the part of the Federal Reserve (in an effort to hold down yields and interest rates) slowly wound down over the course of the year and ended in October. Despite the end of QE, yields on cash remained low across the globe in the final two months. In retrospect, maybe we didn’t need quite so much QE after all.
U.S. bond prices rose during the year surprising many investment analysts and economists. Going into 2014, most experts felt that global growth would accelerate enough to push bond yields higher as was the case in 2013. Instead, bond yields fell as economic growth rates disappointed in major countries such as the U.S., Japan, China and across Europe. The Barclays aggregate bond index rose 1.7% for the quarter and was up 5.8% for the full year.
Commodities Indexes in general had another down year in 2014, losing 10%. This was due in part to lackluster demand from a sluggish global economy, but also due to strengthening of the U.S. dollar. Commodities are priced in dollars and the dollar strengthened against most other major currencies during the course of the year. Gold fell about 2%, its second straight annual loss after gaining every year for a decade up until 2013.
Oil, of course, was the commodity that stole the spotlight, especially during the last half of 2014. As Chart 1 demonstrates, the price of crude oil plunged over 50% from its high of $106 in June to its year end closing price of $53. This is reminiscent of the breathtaking collapse of oil prices we witnessed at the onset of the financial crisis in 2008.
This time, however, it may be different. Back then the price of oil bottomed at year end and then started its recovery, about the time that the stock market began to recover in the spring of 2009. Oil skyrocketed from a low of $34 a barrel to a high of $133 two years later, tripling in price. That was possible then because oil had dropped solely due to “demand” weakness. So as soon as U.S. and global economic activity picked up, as it did in 2009, the price of oil (and oil related companies) quickly followed suit and recovered.
This time it may be different. Now oil is down due to a combination of both mildly lower demand and excess supply. Much of the excess supply is from the processing of North American shale oil through new fracking technology and production is likely to increase further in future years. The combination of lower demand and increasing supply makes it a different ball game when it comes to pricing oil. This time around oil may remain priced at only moderate levels for a quite a while. We will see. Surprising many, just last week the Saudi Prince Alwaleed told USA Today that he is certain we will “never” see $100 a barrel oil prices again! Saudi oil minister al-Naimi made a similar statement in December. Energy related companies will have to adjust to this new reality and this is something we are watching. Chart 2 tracks the price of oil over the last half of 2014.
Other articles that appeared in the Fourth Quarter issue of Your Family CFO Report include Economic Overview and Asset Class Summary. Please call us anytime with questions at 404-874-6244 and feel free to pass our message along to friends.
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