Commentaries

PMC Market Commentary: January 2, 2015

A Macro View – December Monthly Recap

Domestic equity markets started off inauspiciously in December, with some indexes dropping about 5% early in the month as a result of fears of a slowing world economy outside of the U.S. However, robust economic data and favorable seasonal factors enabled major indexes to recover, though results were mixed. Economic data , including real Gross Domestic Product (GDP) and employment were the principal drivers of the market activity. As with the prior month, consumer spending was robust, and federal spending, led by defense, was also a significant factor. Crude oil continued in a freefall, with slackening demand and a pledge by OPEC countries to keep prices low to discourage fracking and exploration in the U.S. Domestic economic data continues to make gains, with the latest estimate of third quarter real gross domestic product (GDP) coming in at +5.0%, up from the previous estimate of +3.9%.

With this environment as a backdrop, stocks posted mixed results in December. The S&P 500 declined -0.3% for the month, and closed out the year with a +13.7% gain. It was the sixth consecutive year of positive returns for the index. The Dow Jones Industrials eked out a modest +0.1% gain for the month, and a +10.0% advance for the full year. The tech-heavy Nasdaq Composite Index declined -1.1% in December, but gained +14.8% for the year. The Russell 2000 Index of small cap stocks was strong on a relative basis during the month, outperforming the Russell 1000 Index of large cap stocks, with returns of +2.9% and -0.2%, respectively. Growth stocks underperformed value stocks during the month. In terms of sector performance, the top performers in the month were utilities, financials and consumer discretionary with gains of +3.5%, +1.8% and +1.0%, respectively. Telecommunications services and information technology were the laggards, with returns of -6.1% and -1.7%, respectively.

International equity markets were mostly lower in December. The reasons for the decline primarily centered on the continued struggles of the eurozone to get its economy on track, and China’s slowing growth. The MSCI World ex-U.S. Index declined -3.3% for the month, and ended the year down -3.9%. Emerging markets also headed lower on concerns over China. The MSCI Emerging Markets Index declined -1.1% for the month (-1.8% for the full year), and the MSCI EAFE Index, which measures developed markets performance, was down -3.4% (-4.5% for the year). Regionally, China was the best performer on a relative basis, advancing +1.2%. Eastern Europe and Latin America were among the poorest performers, with results of -18.3% and -9.1%, respectively.

Fixed-income markets were also mostly lower in December, as investors turned their attention to the prospect that the Federal Reserve is likely to begin raising interest rates in the latter half of 2015. Within this context, the yield curve continued to flatten during the month. Against this backdrop, the 10-year U.S. Treasury yield ended the month at 2.17%, down two basis points from the 2.19% level of November 30th. Broad-based fixed-income indices were mixed in December, with the Barclays U.S. Aggregate Bond Index gaining 0.1% for the month. The index was up +6.0% for the year. As has been the custom in recent months, global fixed-income markets performed relatively poorly, with the Barclays Global Aggregate ex-U.S. Index declining -1.2% for the month. Intermediate-term corporate bonds declined, as the Barclays U.S. Corporate 5-10 Year Index lost -0.3%. The Barclays U.S. Corporate High Yield Index ended the month with a loss of -1.5%. Municipals once again generated positive performance, returning +0.5% for the month. Municipals advanced +9.0% for the year, making it fixed-income’s best-performing segment.

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