“It was the best of times, it was the worst of times….” The often-quoted opening line of Charles Dickens’s Magnum Opus, A Tale of Two Cities might be the best way to summarize 2014 from an economic and investment perspective. 2014 offered a stark contrast between positive pockets of economic recovery and investment strengths, and glaring economic weaknesses and underperforming markets.
Let’s begin with the positive. 2014 was a year when we saw the Dow Jones Industrial Average reach 38 record closing highs during the year, in spite of a rather pedestrian 7.52% gain for the year. The S&P 500 Index, by contrast gained 11.39% for 2014, and set record closing highs a whopping 53 times in 2014. With around 250 trading days a year, that equates to roughly one record high every five trading days for the S&P 500. The year-end returns for both the DJIA and S&P 500 indicate that there were significant periods of market volatility and uncertainty that resulted in returns being lower than would otherwise be expected in a year that saw so many record closing highs in both market indices.
2014 also brought about positive economic news in the US. The nation’s unemployment rate dropped to 5.8% by the end of November. The price of oil dropped close to 50% during the year, as it started the year around $92 a barrel, and finished 2014 near $54 a barrel. The resulting drop in gas prices left consumers feeling more positive about the economy than they had in recent years. Finally, the automobile industry had its strongest showing since 2006, aided by low interest rates, cheap gasoline, and a pent-up demand for new vehicles from consumers who have been keeping their cars longer in recent years.
But there was also bad news in 2014. Internationally, the MSCI Emerging Markets Index lost 4.6% in 2014, and the MSCI Europe Index lost 8.6% as Europe’s economies struggle to get back on track. Here in the US, labor participation rates remain near low levels not seen since the Jimmy Carter era, despite the improving unemployment rate. Wage growth has stagnated in spite of improving labor markets. And the housing sector of the economy was very disappointing with new home sales up only 0.2% in 2014 and existing home sales down 3.8% for the year.
So what’s ahead for 2015? The Wall Street Journal recently surveyed dozens of Wall Street strategists about their predictions for the market, and the consensus return for 2015 was 8.2%. An 8.2% return for the S&P 500 isn’t considered a particularly strong year by most measures, but given some of the economic headwinds facing the market in 2015 most investors might consider 8.2% a great return for next year. A less scientific look at the markets looks at Presidential terms. Looking at anecdotal data going all the way back to 1928, the third year of a Presidential term sees an average market return of 18.6% for the S&P 500 Index, including dividends.
While it can be fun to read about what others are predicting market returns to be, there are some things we know with reasonable certainty for 2015. At the start of 2015 the US economy is strongly positioned among the world’s economies. But that position of strength brings about some challenges for the manufacturing sector of our economy. The strength of the dollar against other world currencies could have a negative impact on our nation’s exports as consumers in Europe and Asia struggle to afford US goods.
Another big topic of interest for 2015 will be the Federal Reserve. It is looking increasingly likely that the Federal Reserve will begin raising interest rates by mid-year. This adds a layer of complexity to planning for both the equity (stock) portion, and fixed income (bond) portions of portfolio allocations. While interest rates are expected to rise modestly in 2015, it is likely that the rate increases will drive uncertainty among investors which will likely result in periods of market volatility similar to those experienced in 2014.
As you read earlier, we are currently enjoying low gasoline prices we haven’t seen for several years. Many economists are predicting the economy could get a significant shot in the arm if the price of oil stays down around $50 a barrel for an extended period of time in 2015. These economists suggest that the lower oil prices could put, on average, an extra $750 of spending money in the hands of consumers this year.
The housing market is not expected by many economists to significantly contribute to our domestic economy in 2015, as younger consumers struggle to pay down student debt and save enough for down payments. Bank lending requirements remain relatively tight, forcing many younger consumers to wait until their financial position improves before owning a home.
Finally, we must continue to monitor the world’s economies and equity markets. Europe faces deflationary pressures and other economic challenges that weighed on their stock markets in 2014. But stimulus activity in Europe and Asia could have a positive impact on their beleaguered economies. Uncertainty about Greece’s continued participation in the European Union could also be resolved, giving the region a shot in the arm. While many European and Asian economies look weak by comparison to the US economy today, I wouldn’t be surprised if their equity markets rebound significantly this year as their economic conditions improve.
So what does this mean to you going forward? 2015 will bring news and surprises that will test the courage of many investors. Now is the time to revisit your intentions and ensure your plan is aligned with your objectives. Contact us to schedule a progress review. As is the case with every year, a disciplined adherence to your financial plan and portfolio allocation will be rewarded in the long run.
Happy New Year!