- Despite several market swings over the course of the year, equities closed 2014 near all-time highs. The U.S. was the best performing market among all developed countries. The large-cap S&P 500 index rose more than 11%.
- Global markets gyrated throughout the year. Growth concerns, currency movements, deflation worries, the conflict in Ukraine, falling oil prices, and Ebola contagion fears all weighed on investors at different points in the year.
- Currently, the economic outlook is characterized by an increasing split between the strong performance of the United States, and problems overseas. Growth looks to be accelerating in the U.S. The jobs outlook continues to improve, and the third quarter’s GDP print of 5% is the highest in over a decade. Japan is in recession, and much of Europe is stagnant. Emerging economies are mixed.
- The Fed has ended its latest round of QE, and is widely expected to start hiking rates in mid-2015. Overseas, the Bank of Japan and European Central Bank are expanding their monetary easing programs to help boost their host economies. Reflecting combined growth and deflation concerns, government bond rates are exceptionally low, below 0.50%, in Japan and Germany, for 10-year debt. In the US, strong overseas demand for Treasuries is also keeping our rates low. The 10-year Treasury sports a yield below 2.0%.
- Thanks to abundant supply rising from the success in domestic shale production, sputtering global demand, and a strong US dollar, crude oil has plunged to a five-year low. Saudi Arabia, traditionally a “swing” producer, has indicated it will maintain its production levels, pressuring price downward. While low prices have their obvious impact in the oil patch, consumers will stand to benefit from a substantial “tax” (expense) cut. We expect an improving consumer economy. In addition, we expect a portion of these consumer savings will likely be spent on rising health care premiums and deductibles.
- So far, corporate revenue and earnings remain solid and growth is accelerating. Margins, although at record levels, are steady to expanding. The upcoming fourth-quarter earnings season should reveal how much improvements in the labor market, and in energy savings, have flowed to discretionary consumer spending.
- Though generally still constructive, we are a bit cautious entering 2015. Valuations for equities can no longer be called cheap, though the lack of viable alternatives makes the case for stocks. We are closely following trends in corporate earnings, and whether the US economy is able to decouple from the softness overseas.