CAPTRUST Chief Investment Officer
Following the first half of 2014’s rather uniform march higher across major asset classes, the second half represented more differentiation across regions and asset categories, driving mixed results.
The U.S. stock and bond markets delivered positive total returns in the year’s fourth quarter, with the U.S. stock-focused S&P 500 up 4.9 percent and the Barclays Capital Aggregate Bond Index advancing 1.8 percent. The indexes also posted strong full-year returns, up 13.7 percent and 6 percent, respectively; other major and sub-asset categories did not fare as well. International developed stocks (as measured by the MSCI EAFE Index) fell 4.5 percent for the year after a 3.5 percent decline in the fourth quarter. Emerging market stocks could not build on a solid second quarter, falling 3.4 percent in the third quarter and 4.4 percent in the fourth to post a -1.82 percent return. Real estate bounced from a negative third quarter with REITs rallying almost 15.1 percent in the fourth quarter, closing up 31.8 percent for the year. Commodities continued their downward move, dropping 12 percent on the quarter and finishing the year down 17 percent.
Central bank activity remains the key driver of this divergence across the global capital markets. In the 2008-09 financial crisis’ immediate aftermath, nearly all global central banks aggressively lowered interest rates and deployed programs to stoke consumer demand. More than six years later, countries and regions have recovered at very different paces. While policymakers in the U.S. and UK are considering gradual changes to their accommodative or “easy money” policies as a result of their solid economic growth, other regions (like Japan) are heading in the opposite direction or contemplating further easing (most notably Europe). Markets have anticipated further easing, driving global interest rates lower and, by definition, bond prices higher, while stock market performance has been quite divergent . The MSCI World Index rose 5.6 percent last year, but if you take out the U.S. market contribution, world stocks fell 6.7 percent.
The other major development in the year’s second half involves energy prices’ dramatic fall; in late June, oil traded at $107/barrel, but by the end of the year prices were nearly cut in half. In addition to tepid demand from places like Europe and parts of the emerging markets, the U.S. has become a major energy supplier. For context, in 2014, the U.S. produced about nine million barrels of oil per day, compared with just five million per day in 2008. This added supply and a desire from major Middle Eastern and Latin American producers to retain market share created more crude inventory than the market demanded, and prices responded. Central bank activity has also impacted currency movements, with the dollar rising by 12.5 percent against a basket of major trading partner currencies including the euro and yen. Since most global commodities are priced in dollars, a rising dollar makes oil more expensive for non-dollar holders, which can also drive oil prices lower.
We continue to see the glass half full with respect to the global economy’s forward prospects. U.S. employment and business activity data remain strong, and the energy price decline, while sharp, will provide help to most global consumers and businesses. However, with the U.S. ending its pro-growth policies and potentially moving to a more restrictive stance by the summer, investors have a lot to consider across asset classes. While the U.S. economy has some underlying momentum, without help from China, Japan, and eventually Europe, the U.S. will not be able to carry the global economy alone. Asset prices can diverge from economic prospects, but Europe, China, and Japan are critical components to 2015’s outcome for investors. The New Year promises to deliver many variables that will shape the investment landscape, and we will keep you posted with our views and perspective.
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