Looking
back on 2014, people are going to say it was a great year to be an investor. They won’t remember how uncertain the journey
felt right up to the last day of a year that saw the S&P 500 close at a
record level on 53 different days. Think
back over a good year in the market. Was
there ever a time when you felt confidently bullish that the markets were
taking off and delivering double-digit returns?
The
Wilshire 5000--the broadest measure of U.S. stocks and bonds—finished the year
up 13.14%, on the basis of a strong 5.88% return in the final three months of
the year. The comparable Russell 3000
index will go into the history books gaining 12.56% in 2014.
The
Wilshire U.S. Large Cap index gained 14.62% in 2014, with 6.06% of that coming
in the final quarter. The Russell 1000
large-cap index gained 13.24%, while the widely-quoted S&P 500 index of
large company stocks posted a gain of 4.39% in the final quarter of the year,
to finish up 11.39%. The index completed
its sixth consecutive year in positive territory, although this was the
second-weakest yearly gain since the 2008 market meltdown.
The
Wilshire U.S. Mid-Cap index gained a flat 10% in 2014, with a 5.77% return in
the final quarter of the year. The
Russell Midcap Index gained 13.22% in 2014.
Small
company stocks, as measured by the Wilshire U.S. Small-Cap, gave investors a
7.66% return, all of it (and more) coming from a strong 8.57% gain in the final
three months of the year. The comparable
Russell 2000 Small-Cap Index was up 4.89% for the year. Meanwhile, the technology-heavy Nasdaq
Composite Index gained 14.39% for the year.
While
the U.S. economy and markets were delivering double-digit returns, the
international markets were more subdued.
The broad-based EAFE index of companies in developed economies lost
7.35% in dollar terms in 2014, in large part because European stocks declined
9.55%. Emerging markets stocks of less
developed countries, as represented by the EAFE EM index, fared better, but
still lost 4.63% for the year. Outside
the U.S., the countries that saw the largest stock market rises included
Argentina (up 57%), China (up 52%), India (up 29.8%) and Japan (up 7.1%).
Looking
over the other investment categories, real estate investments, as measured by
the Wilshire U.S. REIT index, was up a robust 33.95% for the year, with 17.03%
gains in the final quarter alone.
Commodities, as measured by the S&P GSCI index, proved to be an
enormous drag on investment portfolios, losing 33.06% of their value, largely
because of steep recent drops in gold and oil prices.
Part
of the reason that U.S. stocks performed so well when investors seemed to be
constantly looking over their shoulders is interest rates—specifically, the
fact that interest rates remained stubbornly low, aided, in no small part, by a
Federal Reserve that seems determined not to let the markets dictate bond
yields until the economy is firmly and definitively on its feet. The Bloomberg U.S. Corporate Bond Index now
has an effective yield of 3.13%, giving its investors a windfall return of
7.27% for the year due to falling bond rates.
30-year Treasuries are yielding 2.75%, and 10-year Treasuries currently
yield 2.17%. At the low end, 3-month
T-bills are still yielding a miniscule 0.04%; 6-month bills are only slightly
more generous, at 0.12%.
Normally
when the U.S. investment markets have posted six consecutive years of gains,
five of them in double-digit territory, you would expect to see a kind of
euphoria sweep through the ranks of investors.
But for most of 2014, investors in aggregate seemed to vacillate between
caution and fear, hanging on every economic and jobs report, paying close
attention to the Federal Reserve Board’s pronouncements, seemingly trying to
find the bad news in the long, steady economic recovery.
One
of the most interesting aspects of 2014—and, indeed, the entire U.S. bull
market period since 2009—is that so many people think portfolio diversification
was a bad thing for their wealth. When
global stocks are down compared with the U.S. markets, U.S. investors tend to
look at their statements and wonder why they’re lagging the S&P index that
they see on the nightly news. This year,
commodity-related investments were also down significantly, producing even more
drag during what was otherwise a good investment year.
But
that’s the point of diversification: when the year began, none of us knew
whether the U.S., Europe, both or neither would finish the year in positive
territory. Holding some of each is a
prudent strategy, yet the eye inevitably turns to the declining investment
which, in hindsight, pulled the overall returns down a bit. At the end of next year, we may be looking at
U.S. stocks with the same gimlet eye and feeling grateful that we were invested
in global stocks as a way to contain the damage; there’s no way to know in
advance.
Is
a decline in U.S. stocks likely? One can
never predict these things in advance, but the usual recipe for a terrible
market year is a period right beforehand when investors finally throw caution
to the winds, and those who never joined the bull market run decide it’s time
to crash the party. The markets have a
habit of punishing overconfidence, but we don’t seem to be seeing that quite
yet.
What
we ARE seeing is kind of boring: a long, slow economic recovery in the U.S., a
slow housing recovery, healthy but not spectacular job creation in the U.S.,
stagnation and fears of another Greek default in Europe, stocks trading at
values slightly higher than historical norms and a Fed policy that seems to be
waiting for certainty or a Sign from Above that the recovery will survive a
return to normal interest rates.
On
the plus side, we also saw a 46% decline in crude oil prices, saving U.S.
drivers approximately $14 billion this year.
The
Fed has signaled that it plans to take its foot off of interest rates sometime
in the middle of next year. The
questions that nobody can answer are important ones: Will the recovery gain
steam and make stocks more valuable in the year ahead? Will Europe stabilize and ultimately recover,
raising the value of European stocks?
Will oil prices remain low, giving a continuing boost to the economy? Or will, contrary to long history, the
markets flop without any kind of a euphoric top?
We
can’t answer any of these questions, of course.
What we do know is that since 1958, the U.S. markets, as measured by the
S&P 500 index, have been up 53% of all trading days, 58% of all months, 63%
of all quarters and 72% of the years.
Over 10-year rolling time periods, the markets have been up 88% of the
time. These figures do not include the
value of the dividends that investors were paid for hanging onto their stock
investments during each of the time periods.
Yet
since 1875, the S&P 500 has never risen for seven calendar years in a
row. Could 2015 break that streak? Stay tuned.
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