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In the following piece, Fifth Third’s Investment Management Group recaps the market and how it reacted to various events in the month of December. I hope you find this Financial Market Roundup helpful and informative.

The beginning of the year is always a good time to reflect on the preceding twelve months. Some people like to take note of how they progressed on a personal level. Others might evaluate their growth within the context of career development. No matter the measuring stick, if you want to improve it’s important to acknowledge what worked and what didn’t. The same holds true for investing. So with that in mind, now that 2014 has come to pass, let’s take time to look back and highlight some of the big financial trends and developments of the year.

But before we reminisce about 2014 as a whole, let’s see how risky assets performed in the home stretch (December).

  1. The MSCI World Index, a broad measure of developed world’s stock markets declined 1.61 percent for the month.
  2. The S&P 500, a measure of large U.S. companies, declined 0.26 percent for the month.
  3. The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, declined 4.68 percent for the month.
  4. The MSCI REIT Index rose 2.02 percent for the month.
  5. Gold rose 1.46 percent during the month.

Both stock and bond markets performed better in 2014 than many analysts had expected. The S&P 500 was up over 13%, despite a near-technical correction (defined as a decline of 10% or more) in September. Bond returns were even more surprising given that most investors expected interest rates to rise throughout year, not fall. Barclays Capital Aggregate Bond Index, a broad measure of U.S. fixed income securities, rose almost 6% for the year. This was the best performance for bonds since 2011, after losing more than 2% last year.

A return to more “normal” rates of economic expansion was a welcomed development in 2014. We stumbled out of the starting blocks during the first three months of the year as unusually cold weather led the economy to contract by an annualized rate of 2.1%. Fortunately, we quickly recovered, growing by 4.6% in the second quarter, and by an impressive 5% in the third quarter. The fourth quarter will not be definitively known until late March, but most investors are forecasting growth of about 3 to 3.5%. This means that for the entire year the economy likely expanded by more than two and a half percent, which is an improvement, albeit small, from the previous few years. Perhaps more importantly, it suggests that our economy is on the path towards normalization, defined as a growth rate in line with the historic pace of 3 to 3.5%.

Now let’s discuss the labor market, which had a banner year. 2014 was the best year for job creation since 1999, with the economy adding just over 2.8 million nonfarm payroll positions. True, the unemployment rate currently stands at 5.8%, well above levels usually associated with full-employment (4 to 4.5%), but it’s well below 6.7%, where it was at the outset of the 2014.

Perhaps the biggest story of the year was the near-50% drop in crude prices. The catalyst for the plunge was a combination of softening demand in Europe, China and Japan, a substantial increase in U.S. production and a rising dollar. Paying less at the pump padded the wallets of American consumers, a “tax cut” subsidized by domestic and foreign oil producers. Typically consumers respond only after a delay of several months, so the 2014 fall in energy costs is likely to provide a significant tailwind to the U.S. economy in 2015.

And of course, we cannot forget the slew of geopolitical events that yielded significant market reactions last year, often complicating an already uncertain global outlook. Unrest in Ukraine, Russian annexation of Crimea, the rise of ISIS and an outbreak of Ebola were sources of volatility, as markets traded off each piece of incoming news or rumor. While hard to predict specific crises, we can say with certainty that the future will reveal new unsettling events. Investors in 2015 will do well to remember that 2014’s fear-driven declines represented attractive buying opportunities.

 
 
     
 

Market commentary provided by Fifth Third Private Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 11/28/14 through 12/31/14. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

Past performance is no guarantee of future results. Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

S&P 500 Index is a composite of 500 companies, amongst the largest based in the United States, and it often used as a measure of the overall U.S. stock market.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates.

The MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. With 137 constituents, it represents about 99% of the US REIT universe and all securities are classified in the REIT sector according to the Global Industry Classification Standard (GICS®).

Gold Index is the U.S. dollar per Troy ounce

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.


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