Forecasters often cite a figure of 8%–10% as a likely outcome for stock market performance in the year ahead, and 2014 was no exception. As sensible as this may sound, it is worth pointing out that over the past 89 years, the S&P 500 Index and its predecessors have never delivered a total return between 8% and 10% in any single calendar year—in every case it has been higher or lower, often by a substantial amount. For example, starting in 1926, there have been 28 years with a gain or a loss in excess of 25%. Investors would do well to expect the unexpected every year.
Achieving the market rate of return in 2014 required a level of patience and equanimity that eluded many investors—individuals and professionals alike. Stock prices fell sharply to start the year, with the S&P 500 Index sliding 3.56% in January. The market’s weak performance in January appeared to justify the concern that stock prices were unbalanced with business conditions. On February 5, a Wall Street Journal reporter observed, “Increasingly, however, it looks like stock markets are off to a terrible start mainly because hopes for economic growth and the profits that go with it got too high.” As it turned out, stock prices had already touched their low for the year two days earlier, and the S&P 500 Index was destined to rise over 19% from February 3 through December 31.
To an overwhelming degree, professional investors were confident that interest rates would rise in 2014, but the yield on 10-year US Treasury notes instead fell sharply from 3.03% at year-end 2013 to 2.19%. Total returns for the Barclay’s US Aggregate Bond Index totaled 5.97%.
If we could measure collective investor anxiety, it would likely have reached its peak for the year in mid-October. On October 15, the Dow plunged as much as 460 points during the day. What caused such a fierce selling? Market commentators cited selling by momentum-oriented hedge funds, fears of a weakening global economy, and gloom associated with another reported US case of the Ebola virus. Many investors braced themselves for a continuing slide in stock prices that never occurred. Year-to-date stock returns were back in the plus column the following day and kept rising through December.
Stock returns in non-US markets were generally positive in 2014 but with a wide range of results. Among 45 developed and emerging markets tracked by MSCI, total return expressed in local currency ranged from 38.66% in Israel to -31.59% in Greece. Thirty-five non-US markets had positive returns, including 17 with higher returns than the US. With so many pessimistic discussions of the European economy in recent months, many investors might be surprised to learn that stocks in Belgium, Denmark, Finland, Ireland, and Sweden outperformed US stocks when expressed in local currency. Appreciation of the US dollar relative to every major currency significantly penalized net results for US investors. Even the Swiss franc, long associated with fiscal rectitude, slumped relative to the US dollar. Total return for the MSCI World ex USA Index (gross dividends) was 6.80% in local currency but -3.88% in US dollar terms.
The recent strength of the US dollar stands in stark contrast to the gloomy predictions we heard just a few years ago. For example, in the book Aftershock, published in 2011, the authors argued that the financial crisis of 2008–2009 was “relatively small compared to the coming dollar crisis” and predicted that this “unsustainable currency bubble” was destined to burst with disastrous consequences. Exchange rates fluctuate in unpredictable ways, and it would not be surprising to see such arguments resurface in a few years.
The year 2014 was a challenging one in many respects, but perhaps the biggest challenge was to resist the urge to dip and dart in response to the cascade of news events and opinions that suggested action of some sort was imperative for financial success.
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and businesses with their overall wealth management, including retirement planning, tax planning and investment management needs.