2014 proved to be another banner year for U.S. large cap stocks. The S&P 500 closed its third straight year with double digit growth, returning 13.68%. To note, even though the S&P performed better than its historic norm, some asset classes or asset categories performed much better. Many of these asset classes languished last year.
REITS, which were battered after May 2013 due to rising rate expectations, ended last year barely positive. This year, on average, they gained twice as much as the S&P 500. Also of interest, Utilities, where growth prospects are generally modest and are therefore purchased for yield, usually struggle when rates are rising. After a tough 2013, Utility stocks more than doubled the broader market in 2014.
Because of the strong U.S. economy, interest rates on the short end rose through the year and hurt total returns on short to intermediate term bonds. However, the slowing economies in Japan and Europe reduced inflation expectations and brought down rates on the longer end. As a result, long-term U.S. Treasuries easily outpaced the S&P 500 Index.
Global infrastructure continued to do well despite the fact that international and emerging market equities had negative returns. Domestic small cap stocks, while providing positive returns, trailed their large cap brethren considerably.
After a bright first quarter, commodities once again disappointed with negative returns. Much of the performance can be attributed to the global economic slowdown, but the decline in oil was especially acute. During the last half of the year oil prices dropped about 40%. While the global slowdown can be credited for some of the decline, a good portion can be ascribed to the growth of supply coming from Libya, Iraq, and especially the United States, where production has doubled. This drop in price is great news when filling your gas tank, but not so great when you have money invested in it.
High yield bonds, which generally have a higher correlation to stocks than high quality bonds, underperformed their counterparts. This is partly due to their high exposure to the energy sector.
So the big question is, with the U.S. economy picking up steam throughout 2014, can the S&P 500 continue its success into 2015?
Check back for my next blog as I look ahead to the issues facing us in 2015.
Washington Trust Bank believes that the information provided was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.