Q4 2014: Investor Review 2014 and Outlook for 2015

Investor Review 2014

A casual observer might look at the Dow Jones Industrial Average return of 10% and conclude that 2014 was a fairly normal year for stocks. Indeed the monthly returns also appear uninteresting and calm and a ten percent return is equal to the long-term average annual return for US equities. But on closer examination, 2014 was anything but normal and uninteresting.

Let’s rewind the clocks to January 2014. The consensus view was that the US stock market was “slightly expensive” relative to the long-term relationship between market capitalization and the US GDP. Meanwhile European countries and emerging economies looked very cheap relative to their historic price multiples. The US economy was expanding and the Federal Reserve was signaling an end to monetary support. The broadly accepted view was that interest rates would rise as the economic expansion broadened. The only dispute among analysts and economists was seemingly how far and how fast rates would rise.

Many prognosticators declared that 2014 would be a negative year for bonds. Rising interest rates were going to hurt utilities and possibly real estate. Tactical allocators sought to move bond allocations to other income sources and to move some US equity allocations overseas to buy into the deep value in other countries.

In a time when the US economy was improving while central banks in Europe and Japan were taking on enormous monetary support, it was easy to conclude that commodity prices would be stable. Some predictions even had oil going to $150 barrel by end of 2014. Cautious investors sought the consistent returns and good yields in the energy sector.

All of these proved to be wrong. In fact, divergences from expectations were quite large. Interest rates did not rise, but instead fell sharply. Oil prices plunged in the late summer and throughout the fall. Inflation, as measured by the Consumer Price Index, was back below 2%.

By year-end, utilities (+23%) were the highest performing sector and energy (-8%) the worst. Oil prices declined 42% from $92 to $53 per barrel. Only 30% of the stocks in the S&P 500 outperformed the index, signaling a very narrow rally concentrated in a minority of companies.

Several of the world’s largest tactical allocators finished 2014 with negative returns. The following is an excerpted list of market predictions by some of the “Smartest Market Watchers” in 2014:

• Interest rates will rise globally (rates stayed at all-time lows, Germany even saw negative rates)
• Oil will go to $150 (oil plunged to below $50)
• We will see inflation rise (inflation fell)
• Commodities will be strong (they dropped 24% in the last 6 months)

Investment decision-making is hard. The look back at predictions is not to poke fun at other people’s outlooks but to point out just how difficult investing can be in short time frames. Looking to profit from short-term trends or to earn a good result within a calendar year is more a trading philosophy than a real investment process.