Fourth Quarter 2014 Market Review

Wall Street forecasters believe the U.S. economy started off 2015 with the strongest momentum in at least a decade and is in better shape today than any other developed country in the world.  Importantly due to the full scale resurgence of the U.S. Energy Industry, economic growth has averaged 4.8% over the past two quarters, the highest rate in over a decade

With this non-farm payrolls are increasing at the fastest rate since 1999.  As a result, most stock and bond prices rose last year with the S&P 500 up 13.7%, the Dow Industrial Average at +10.4%, the average domestic stock mutual fund up 7.5% and the Barclay’s Government/Corporate Intermediate Bond Index rising 4.9%.  Large and middle sized stocks performed much better than small cap stocks during the year, but in the foreign stock arena, emerging market stocks declined 2.06% while foreign markets with developed markets were off 6.43%.

The equity markets in the U.S. were unusually volatile last year as investors negatively reacted to a number of events including the abrupt slow down in the economy early in the year, followed by Russia’s takeover of Crimea (March) and then the Ebola (October) crisis.

While the market recovered from all of these events by the end of October, another blow to investor confidence surfaced in December as oil prices declined sharply prompting many to assume that the global economy was in trouble. The outlook for 2015 will have a lot to do with how well the European economy holds up next year and what happens to the price of oil.

European officials recently announced quantitative monetary easing program similar to what the U.S., U.K. and Japan have been using to stimulate economic activity.  At a minimum, their efforts should keep the Eurozone from slipping into a recession, ward off deflation, and perhaps help to modestly grow the economy.  This should be enough to remove the negative aura from the market.

We’ve several times in the past made mention of the very major and positive changes expected to incur in the energy industry, and these expectations are quickly becoming a reality.  The fact that the U.S. is near or at energy independence and prices have declined, has major positive long term benefits for the U.S. and many other parts of the world.  A near term perceived problem, however, is that the sharp drop in oil and other energy prices reflects a very weak global economy.

While we do not believe that to be the case, the stock market might prove volatile until it becomes clear that oil prices have at least stabilized. Longer term, the changing complexion of the Energy Industry promises to have fundamentally positive effects on the U.S. economy and its stock market