Economic Backdrop

During the 4th Quarter of 2014, a series of significant monetary policy shifts took place among major central banks around the globe. Along with those shifts came carefully worded statements which have provided onlookers with a measured degree of clarity on the outlook for future monetary policy changes.

The Bank of England (BOE) maintained its low benchmark interest rate stance throughout the quarter, despite a minority of votes in favor of a more immediate increase. The European Central Bank (ECB) held key rates near or below zero and began an asset purchase program in October with a two-year horizon. Subsequent statements from ECB President Mario Draghi indicated a likely expansion of the program to include sovereign bonds. Meanwhile, the U.S. Federal Open Market Committee (FOMC) concluded its asset-purchase program in October. The FOMC left benchmark policy interest rates near zero, and announced a patient stance in December toward raising rates in 2015. Finally, the Bank of Japan (BOJ) delivered a surprise in late October via a significant expansion of its asset purchase program. This, in addition to a postponed tax increase, came in response to the onset of a recession in Japan.

Across the globe, the economic story was centered on the deterioration in energy costs. This reduction in energy pricing which brought down consumer costs also spurred a stronger than expected quarter from retailers in the U.S., the U.K., and the Eurozone.

Industrial production entered the quarter quite low but began to generally accelerate in developed markets with the U.S. surpassing expectations in November.  The U.K. also picked up speed at about the same time and, after a very bleak start early in the quarter, the Eurozone seemed to pick up the pace in late November and December.

Here at home, a combination of labor market improvement and elevated consumer sentiment defined the economy. We saw initial jobless claims hit a 14-year low in early October and claims remained low for most of the quarter. The unemployment rate fell to 5.8% and held there in November amid the largest gains in nonfarm payroll in almost three years. In addition, average hourly earnings also surprised to the upside.

In the U.K., the labor picture was mostly positive with accelerating wage growth offsetting an uptick in the jobless rate during November. In the Eurozone, persistently high unemployment prevailed at 11.5% but shifts in unemployment were noted as employment gains in some countries were masked by continuing job losses in others.

Market Impact

Equity markets were near flat in the aggregate, but returns varied widely by sector. The consumer discretionary sector of the MSCI AC World Index delivered the best performance, followed by information technology, utilities, consumer staples and then healthcare. Amid plunging oil prices, equities in the energy sector fell deeply into negative territory for the quarter while the materials and telecommunications sectors also struggled.

Fixed-income markets delivered a broad range of returns during the fourth quarter. U.S. Treasuries, U.S. mortgage-backed securities and investment-grade corporate debt all performed well. U.S. Treasury Inflation-Protected Securities declined into negative territory and worse performance still was turned in by U.S. high-yield debt. Global investment-grade debt (ex-Treasuries) was slightly negative for the fourth quarter and local-currency emerging-market debt performed even worse.

Index Data For Fourth Quarter

  • The Dow Jones Industrial Average Index returned 5.20%.
  • The S&P 500 Index gained 4.93%.
  • The NASDAQ Composite Index returned 5.70%.
  • The MSCI AC World Index, used to gauge global equity performance, increased by 0.41%.
  • The Barclays Global Aggregate Index, which represents global bond markets, fell by 1.04%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index”, increased in the quarter as a whole, moving from 16.31 to 19.20.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $91.16 a barrel at the end of September to $53.27 on the last day in December.
  • The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended December at $1.21 against the euro, $1.56 versus sterling and at 119.9 yen.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.