As 2014 closes, it is good to look back and see what kind of year it was. Generally speaking it was a good year for most people who had investments. This was the case, whether someone was predominately invested in stocks, bonds, or real estate.
During the year the stock market had several minor corrections, but the major averages never dropped more than 10 percent. After each correction the stock market was able to resume its advance to establish new highs. Assuming no major losses over the last three trading days of the year, the broad based S&P 500 will have a double-digit gain for the year.
2014 also turned out to be a good year for bond investors. The 10-year Treasury started the year yielding close to 3 percent, and as of this past Monday, the yield was near 2.25 percent. For those unfamiliar with bonds, when interest rates drop the value of bonds increases.
The decrease in longer-term interest rates caught many by surprise. Towards the end of 2013 interest rates were starting to rise, and that trend was expected to continue in 2014. Instead interest rates declined in 2014 largely because economic conditions were weaker overseas, and with the dollar strengthening the U.S. Treasuries were considered a safe haven.
This decline in interest rates was beneficial for the stock market. However, gains were not uniformly strong across all areas of the market. Interest sensitive stocks, such as Utilities performed very well along with most large company stocks, but smaller capitalization companies only registered modest gains. In essence, investors gravitated towards safer more stable companies.
This decline in interest rates helped the real estate market by making mortgages more affordable. While real estate prices nationally increased at a modest pace, in our local area of Culver City and the Westside of LA, prices are establishing new highs.
One area that significantly underperformed for the year was international investing. This was due to poorer overseas growth in many countries, plus the effect of a stronger U.S. dollar.
The labor market continued to show moderate growth throughout 2014. Job growth was consistent throughout the year and the unemployment rate declined both nationally and in our area Unfortunately, average wage growth was still fairly anemic at close to 2 percent.
Probably the biggest surprise of the year was the recent substantial decline in oil prices. This has been a major benefit for most people, and has helped to propel consumer spending.
Unless someone had virtually all of their assets in an S&P 500 index fund, overall account returns for most people would be less than the S&P 500 return. For an account well balanced between stocks and bonds with some international investments, overall returns for 2014 would probably be around 8 to 10 percent.
People need to realize that the best performing asset class will vary from year to year. While small stocks and international did poorly in 2014, there have been many years when those asset classes have done better versus the S&P 500. Likewise there will be some years where bonds will perform better versus stocks. That is why I highly recommend that individuals have a well-diversified portfolio.
Expectations coming into 2014 were really not that high for financial markets, though for most people it actually became a decent year. Next week I will try to attempt to offer some insight into what to expect for 2015. Obviously recapping what has already occurred is a relatively easy task, while making a forecast will always be subject to some error.