Market Update for January 2015

Brad McMillan, Commonwealth Financial Network’s (PWA’s broker/dealer) Chief Investment Officer, kicks off 2015 by providing a market update on the U.S. and global economic recoveries, the dropping price of oil, and the strength of the U.S. dollar.  Read the highlights below:

Another Strong Year for U.S. Markets

For the second year in a row, U.S. markets were the place to be, closing 2014 with a very strong fourth quarter despite a weak December. The Dow Jones Industrial Average was up 0.12 percent in December but a much stronger 5.20 percent for the quarter. The S&P 500 Index was down 0.25 percent in December but posted a 4.93-percent gain for the quarter. The Nasdaq lost 1.16 percent for the month, though it gained 5.40 percent during the quarter.

Gains for the year were widespread, with the Dow and Nasdaq up 10.04 percent and 13.40 percent, respectively. The S&P 500 did best, gaining 13.69 percent for the year.

U.S. economic growth accelerated, with the most recent report on gross domestic product (GDP) growth announcing a 5-percent gain for the third quarter. Corporate revenues and earnings also increased.

An increase in market valuation levels supported share price gains. At year-end, U.S. markets were at or close to all-time highs, and technical factors remained strong.

International markets underperformed U.S. markets over the month, quarter, and year. The MSCI EAFE Index, representing developed international markets, was down 3.46 percent for December and 3.57 percent for the quarter. The MSCI Emerging Markets Index did worse, declining 4.82 percent in December and 4.88 percent for the fourth quarter.

For the year, developed markets were down 4.90 percent, and emerging markets dropped 4.63 percent. Technical factors were soft, with both indices well below their 200-day moving averages.

The Barclays Capital Aggregate Bond Index was up 0.10 percent for December and 1.79 percent for the fourth quarter, contributing to a 5.97-percent gain for the year. This strong performance was driven by a consistent, and unexpected, decline in interest rates throughout 2014. Rates on the benchmark 10-year U.S. Treasury bond declined from 3 percent to 2.17 percent during the year, largely driven by uncertainty elsewhere in the world.

Economic Recovery Hits Escape Velocity

The major economic story for the fourth quarter was the Fed’s decision, driven by ongoing economic improvement, to stop buying bonds, signaling that, in its judgment, the economy didn’t need the support. In fact, by year-end, the U.S. recovery was moving from strength to strength. The 5-percent third-quarter GDP number was the strongest since 2003. Moreover, as our chart shows, there has been a consistent increase in GDP in recent years.