Fassi Financial 2014 Economic review

Presented by
Terri Fassi, CPA, MBA, CDFA
Mike Fassi, CLU, CHFC
Website:  Fassi Financial

QUOTE OF THE YEAR

“Expect the best, plan for the worst, and prepare to be surprised.”


- Denis Waitley

0

THE YEAR IN BRIEF
As we look back on 2014, we see a year that in many ways defied expectations. Few stock market analysts thought the S&P 500 would post another double-digit annual advance – but it did. It returned 11.39%, 13.69% including dividends. Worries about how well stocks would hold up without QE3 were prevalent – but the bulls still ran after October. Who saw such a freefall coming for oil prices? Who knew that U.S. GDP would hit an 11-year peak? Weren’t mortgages supposed to become more expensive? Wasn’t the bottom going to fall out of the bond market? So much for forecasts. There was no correction in the Dow, S&P or Nasdaq; there was more optimism on Main Street. Economically, America looked better and better in comparison to the rest of the world.1

DOMESTIC ECONOMIC HEALTH
Our most important economic indicators all pointed to a full-fledged recovery. If America wasn’t “all the way back,” it was certainly close.

By November, the jobless rate stood at 5.8%, down 1.2% in a year and 4.2% from five years ago. Non-farm employers had added an average of 224,000 jobs over the past 12 months, including a gain of 321,000 in November.2

Quarterly GDP kept rising. In Q1, the economy contracted 2.1%. Q2 and Q3 saw respective expansion of 4.6% and 5.0%. That Q3 mark was the best in 11 years, and reflected quarterly gains of 8.9% for business investment, 9.2% for durable goods and 3.2% for real personal consumption expenditures (real PCE was at 2.5% a quarter earlier). Month-to-month consumer spending (as measured by the Commerce Department) was positive during most of 2014, reaching a (revised) high of +1.0%.3,4

Inflation remained weak. By November, the headline Consumer Price Index had risen only 1.3% in a year, and the core CPI had advanced just 1.7%. November’s Producer Price Index showed a 1.4% annual increase; the core PPI was up 1.8% in 12 months.4

Households felt better about their economic prospects in 2014. The University of Michigan’s consumer sentiment index gained 11.1 points during the year, rising to 93.6 by the end of December. The Conference Board’s consumer confidence index, which had ended 2013 at 78.1, finished 2014 at 92.6. This optimism helped retail sales, which were up 4.9% annually by November (the gain for 2013 was 3.6%).4,5

America’s factory and service sectors saw solid expansion in 2014, according to the respected purchasing manager indexes maintained by the Institute for Supply Management. Both ISM PMIs stayed above 50 all year, indicating uninterrupted sector growth. ISM’s services PMI was at 53.0 in December 2013 and reached 56.2 in December 2014; its manufacturing PMI rollercoastered across the year and actually tailed off, ending 2014 1.5 points lower at 55.5. With data gathered for 11 months of 2014, the Commerce Department announced that hard goods orders were on pace to rise 6.7% from 2013 levels.4,6

Beyond these statistics, 2014 was the year when Janet Yellen replaced Ben Bernanke as chair of the Federal Reserve, overseeing the gradual tapering of the central bank’s third round of easing since the Great Recession. After QE3 wrapped up, the Dow and S&P 500 rose and bond prices rallied. America’s healing, consumer-driven economy stood out from the sputtering, export-dependent economies overseas. The volume of M&A activity reached a 7-year peak. The Ebola pandemic didn’t force a correction in the stock market, and neither did the staggering drop of oil or the actions of ISIS. The average price of a gallon of gas fell from a peak of $3.70 to the vicinity of $2.30 as the year ended, a savings that translated to $15.4 billion more per month in the pockets of American households.7

GLOBAL ECONOMIC HEALTH
Economic prospects looked dimmer for some regions of the world as 2014 ebbed into 2015. Last year saw Japan and Brazil contend with recessions. Oil-reliant Russia was on the brink of one, with its ruble cut down against a basket of key currencies. Economic expansion in China slowed to a rate of 7.3%, a 5-year low. As demand for oil lessened, a glut in global crude supplies emerged.7  

The euro area ended 2014 with dangerously low inflation (0.3%), annualized GDP of just 0.8%, and 11.5% unemployment. The Markit euro area factory PMI stood at only 50.8 in December – and that was a 5-month high. Greece again threatened to crack the euro area, with new elections set for early 2015 and a strong possibility that the Syriza party might come to power and rebuff austerity measures put into place as a condition of that nation’s bailout. The European Central Bank edged toward a stimulus program similar to those created by the Federal Reserve.8,9,10 

China’s GDP target for 2014 was 7.5%, and thanks in part to a housing market slump, its economy seemed poised to fall short of it. China’s State Information Center forecast 7.0% GDP for 2015. Here’s the silver lining: cheap crude could make things easier for China and many other nations this year. The International Monetary Fund sees global growth of as much as 4.6% in 2015 if oil stays roughly where it is now (and 3.8% if it rebounds to its former price levels).10,11

WORLD MARKETS
What was the world’s hottest stock index in 2014? It was Argentina’s MERVAL, which gained 59.14%. Coming in second, we find the Shanghai Composite – it rose 52.87%, with its A Shares up 53.06%. What was the world’s coldest index? Russia’s RTS, which dropped 45.19% in 2014. Now for some gains and losses in between: Bovespa, -2.91%; IPC All-Share, +0.98%; TSX Composite, +7.42%; Dow Jones Americas, +8.90%; Nikkei 225, +7.12%; Manila Composite (PSE), +22.76%; Sensex, +29.89%; Hang Seng, +1.28%; Asia Dow, +0.88%; CAC 40, -0.54%; DAX, +2.65%; IBEX, +3.66%; ISEQ, +15.09%; FTSE 100, -2.71%; STOXX 600, +4.35%; Europe Dow, -10.57%. The Global Dow gained but 0.64% and the MSCI World Index rose just 2.93% in 2014; the MSCI Emerging Markets Index retreated 4.63%.12,13

COMMODITIES MARKETS
For investors in the marquee energy futures, 2014 was a disaster. The year brought losses of 45.87% for West Texas Intermediate crude, 48.26% for Brent crude and 31.68% for natural gas. Oil ended 2014 at a 5½-year low of $53.27 a barrel.14,15

The losses certainly didn’t end there. Gold gave back 1.72% on the COMEX, silver 19.36% and platinum 11.79%. Copper retreated 16.76% for the year. Soybeans lost 22.39%, wheat 2.48% and corn 5.92%.14

The broad Bloomberg Commodity Index had its fourth straight down year; that hadn’t happened since 1991. There were winners in the commodities markets in 2014, however. Coffee jumped 50.5%, cattle prices 23.2%. Rising from 80.04 at the end of 2013 to 90.27 at the end of 2014, the U.S. Dollar Index advanced 12.78%.14,16

REAL ESTATE
The housing market started to normalize in 2014 – which is to say, it cooled off. In November, existing home sales were up 2.1% year-over-year after stumbling 6.1% for the month, according to the National Association of Realtors. The Census Bureau reported new home purchases down 1.6% year-over-year in November.17,18

October’s S&P/Case-Shiller Home Price Index – the most recent edition as the year ended – showed a 4.7% nationwide advance for existing home values. NAR calculated a median sale price of $205,300 in November, and that represented a 5.0% annualized gain.19,20

NAR’s pending home sales index came in at a reasonably healthy 104.8 in November, up 4.1% in 12 months. As for getting things going, the Census Bureau announced a 7.0% decline in groundbreaking from year-ago levels in November; building permits were down 0.2% year-over-year. Even so, the homebuilder sentiment index maintained by Wells Fargo and the National Association of Homebuilders remained near a 9-year peak in December.20,21,22

While 2013 saw mortgages grow more expensive, 2014 saw them become cheaper. Looking at Freddie Mac’s Primary Mortgage Market Survey from December 26, 2013, we see an average interest rate of 4.48% for a conventional 30-year mortgage. In Freddie’s final 2014 PMMS (December 31), interest on the 30-year FRM averaged 3.87%. How about the refinancer’s favorite, the 15-year FRM? Again, the mean rate descended – from 3.52% to 3.15%. Mean interest rates on 1-year ARMs dropped from 2.56% to 2.40%. The exception to the trend: average rates on 5/1-year ARMs. They were at 3.00% in 2013’s last survey, 3.01% a year later.23,24

LOOKING BACK…LOOKING FORWARD
Wall Street saw stocks advance for a sixth straight year, and the gains were sizable. Also notable: the decrease in the 10-year Treasury yield. It was 2.17% when 2014 ended, up at 2.99% as 2014 began. (As for the real yield on the 10-year TIPS, the table below tells that story.) The year saw the Russell 2000 rise just 3.53%; the CBOE VIX jumped north 39.94%, making it the best performer among U.S. indices in 2014. Closing values on December 31: DJIA, 17,823.07; S&P, 2,058.90; NASDAQ, 4,736.05; RUT, 1,204.70; VIX, 19.20.12,25

% CHANGE

2014

2013

5-YR AVG

10-YR AVG

DJIA

+7.52

+26.50

+14.18

+6.53

NASDAQ

+13.40

+38.32

+21.74

+11.77

S&P 500

+11.39

+29.60

+16.93

+6.99

REAL YIELD

12/31 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.49%

0.80%

1.48%

1.68%


Source: online.wsj.com, bigcharts.com, treasury.gov - 12/31/1412,26,27,28

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

Can the market rise for a seventh straight year? January is certainly off to a tough start, with a few analysts wondering if the slide in crude prices might bring a correction. While America now appears economically stable, economies of many other nations are ailing. If oil doesn’t rally and the Fed raises interest rates in the middle of 2015, how will the bulls respond? How will they contend with ongoing dollar strength, given that many S&P 500 firms count on offshore earnings? Three asset-purchase campaigns and a few choice policy statements have bolstered this bull market; are investors still emotionally presuming that the Fed will rescue them from any geopolitical shocks or bearish shifts? In the face of these and other questions, bulls point to the resiliency of stocks against myriad challenges since 2009. The core optimism is still there, and it seems foundational. So next January, maybe we will regard 2015 as another pleasantly surprising year for Wall Street.

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Terri Fassi and Mike Fassi may be reached at 970-416-0088 or tfassi@cfiemail.com or mfassi@cfiemail.com.

Website:Asset Protection Group

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. MarketingPro, Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The price-weighted MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The RTS Index (abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Mexican IPC index (Indice de Precios y Cotizaciones) is a capitalization-weighted index of the leading stocks traded on the Mexican Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Dow Jones Americas Index measures the Latin American equity markets by tracking 30 leading blue-chip companies in the region. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Philippine Stock Exchange PSEi Index is a capitalization-weighted index composed of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE; it was formerly named the PSE Composite. The Asia Dow is an equal-weighted, 30-stock index that measures 30 of the leading blue-chip stocks traded in the Asia/Pacific region. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted index in Hong Kong that records and monitors daily changes of the 48 largest companies of the Hong Kong stock market. The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain's principal stock exchange. The ISEQ Overall Index is a capitalization-weighted index of all official list equities in the Irish Stock Exchange, excluding U.K.-registered companies. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The Dow Jones STOXX 600 Index captures more than 90% of the aggregate market cap of European-based companies. The Europe Dow measures the European equity markets by tracking 30 leading blue-chip companies in the region. The Global Dow (GDOW) is a 150-stock index of corporations from around the world, created by Dow Jones & Company. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. 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. Past performance is no guarantee of future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

Citations.

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20 - bloomberg.com/news/2014-12-22/sales-of-u-s-existing-homes-fell-more-than-forecast-in-november.html [12/22/14]

21 - ycharts.com/indicators/pending_home_sales_index [1/6/15]

22 - 247wallst.com/housing/2014/12/16/new-housing-starts-building-permits-drop-in-november/ [12/16/14]

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27 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F04&x=0&y=0 [12/31/14]        

28 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/5/15]