America Leads the Way: 2014 in Review – Q4 2014
Dylan B. Minor PhD, MS, CFP®, ChFC, CLU, CIMA
Chief Investment Officer, Omega Financial Group
“[I feel] taller.” Steve Rogers’ response after his transformation, from the film Captain America: The First Avenger
The new-normal seems to mean that we are treated to a collection of nail-biting-events every year. And our most recent year was no exception! In 2014, we caught whiffs of a 1980’s Russia reemerging: Putin signed a treaty to annex Crimea and repeatedly clashed with the Ukraine and the West. ISIS became a household name, as did Ebola. But not all was frightening. Janet Yellen officially took up the Federal Reserve’s top position, the first women to do so and at a time when the Fed’s balance sheet had ballooned to over 4.5 trillion. She has begun unwinding the heavy fiscal stimulus that helped us crawl out of the so-called Great Recession. And now, the US leads the world economies on many measures while oil prices have fallen precipitously. Although there are some US losers from this energy development, on whole it should provide further support for the US economy.
In terms of financial markets last year, the Dow Jones Industrial Average Index was up some 7.5% in price-terms, and the S&P 500 was up over 13%, including dividends.1
However, these narrower markets are not representative of the broader market. Currently, the largest 5% of companies of the S&P 500 represent almost 1/3 of the value of the index.2 Thus, the index especially rises and falls with the fortunes of these relatively small number of large companies. And last year was a good year for these indexes, as large companies did particularly well. Smaller US stocks returned closer to 5% for the year. Many international developed and emerging markets had positive returns. However, due to the increasing strength of the US dollar, in dollar terms, broad international markets were down 2-5%. In sum, a balanced, global mix of stocks netted roughly 5% for 2014. Meanwhile, many US bond markets were up 3-6%. Although many international bond markets had similar returns in terms of their local currencies, overall international bond returns in US dollars were down 3-5%. Inflation has been tepid, while some have even become a bit concerned that inflation is too low. Consequently, commodity markets fell on whole last year. However, for you steak lovers out there, cattle were one of the best investments last year, leaping in value by some 22%. Now that’s what I call a bull market! In the end, a typical US investor with a moderate risk, global portfolio might have garnered a modest 4-5% return in 2014. This was not the roaring 90’s but neither was it 2008.
Looking forward, I see the most likely outcome being that the US continues to lead the global economic recovery. Interestingly, the Europe Central bank just decided to start a government bond buying program, following in the steps of the US, which has already finished its program. Global financial markets seemed to think imitating the US was a good idea, as they greeted the news with great market gains. Meanwhile, the US dollar has had a strong run, and is likely to extend its run, at least in the near term, as other nations continue to stabilize. This all means that it is a great time to go on an international trip!
A leader of the emerging market economies, China, had growth “slow” to an expected annualized rate of 7.7%. At this time, many people are much more pessimistic on the economic prospects of China specifically and the world excluding the US more generally. Naturally, this sentiment makes now a good time to pursue adequate global exposure to key international economies. This is especially true against the backdrop of how high the US stock markets have risen. As my granddaddy used to tell me: buy the straw hats in Winter and the rain umbrellas in the Summer. Of course, at Omega, as part of our States of the World Wealth Management, we still own some of both, because although we don’t know if it will be sunny or rainy, we do know it will be sunny or rainy…
1 Market returns are obtained from Morningstar and Eaton Vance Investment Managers.
2 Standard & Poor’s
This commentary reflects the personal opinions, viewpoints and analyses of the Omega Financial Group, LLC employees providing such comments. No advice may be rendered by Omega Financial Group, LLC unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where Omega Financial Group, LLC and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.