- The fourth quarter was anything but calm for U.S. equity investors.
- Macroeconomic weakness and geopolitical unrest led non-U.S. stocks to struggle relative to U.S. stocks in the final months of 2014.
- Many factors could support the U.S. market in the year ahead, as consumers enjoy a number of stimulative "gifts."
- Non-U.S. markets should benefit from a variety of tailwinds, from currency weakness to lower oil prices.
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Earnings trends on course for 2015
Bob Ewing, Co-Head of U.S. Equities, discusses trends in corporate earnings.
- U.S. equities
- Non-U.S. equities
Despite energy sector jitters, U.S. stocks deliver another annual gain
While U.S. equities closed out 2014 with yet another advance, the fourth quarter was anything but calm for investors. The dominant theme for the quarter was energy — plummeting oil prices, severe weakness in energy stocks that are closely tied to the price of oil, and the resurgence of volatility in the broader market in response to these declines. In October, the market saw its first major pullback since 2011, declining almost 10% as investors grew worried about global geopolitical tensions, sharply declining oil prices, and slowing growth in Europe and China. Volatility, as measured by the VIX Index, escalated through mid-October, but calmed by month-end.
Turbulence returned to the market in early December as oil prices plunged further, but these losses were also short- lived, as equities staged another rebound and posted their longest winning streak in over a year. On December 23, the Dow Jones Industrial Average closed above the 18,000 milestone for the first time ever, and on December 29, the S&P 500 Index marked its 53rd record close of the year.
Waiting out the pause in global growth
Markets outside the United States have generally been under pressure due to what we would describe as a pause in global growth. Thus, while the likelihood for a robust economic recovery in several regions around the world appeared to diminish as 2014 came to a close, we see this more as a recovery delayed rather than a recovery denied.
At the same time, we recognize that finding strong-performing stocks under difficult macroeconomic conditions may prove somewhat challenging. This is particularly the case in Europe, where pressure from Russian sanctions and slowing growth in China, for example, were and are likely to remain difficult head-winds for exporters. Nevertheless, increased monetary stimulus, lower oil prices, and the completion of an asset-quality review in Europe should all become tail-winds for non-U.S. stock performance.
As we discuss later in our outlook, foreign exchange dynamics should also continue to present investors with opportunities as well as risks. Weakness in the euro, the yen, and a variety of emerging-market currencies relative to the U.S. dollar, for example, may enhance the global competitiveness of non-U.S. exporters, though the inflationary impact of widespread currency weak-ness is a factor we will monitor closely.