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Monthly Economic Update for January 2015

December certainly looked like it was going to be a trying month for the market, but then Wall Street got a little help from the Federal Reserve. In its December 17 policy statement, the central bank told the world that it would be “patient in beginning to normalize the stance of monetary policy.” That declaration helped turn stocks around. Oil prices (and retail gas prices) declined further in December; readings on fall consumer spending and Q3 GDP improved. When 2014 ended, the S&P 500 had posted another double-digit yearly gain – and while some foreign economies seemed to be slowing or sputtering, ours looked quite healthy.1

Three very positive indicators from the Commerce Department confirmed how well the economy was doing. Third-quarter GDP went in the books at 5.0% (up from 3.9% in the second estimate). Consumer spending rose by a very strong 0.6% in November with consumer wages also rising 0.4%. Cheap gasoline and growing consumer confidence seemed apparent factors in the impressive 0.7% November gain in retail sales.2,3 

America’s two most-watched household sentiment gauges pushed higher in December. The Conference Board’s consumer confidence index rose 3.9 points on the month to 92.6, and the University of Michigan’s index gain 4.8 points off of its final November mark to reach 93.6.2,3

More good news came from the Labor Department: November had been an outstanding month for hiring. Sure, the jobless rate stayed at 5.8% (the U-6 rate encompassing unemployed and underemployed ticked down to 11.4%), but the economy added 321,000 new jobs, 86,000 of them in the professional and business sectors. Additionally, the Labor Department revised the employment gains of September and October upward – 44,000 more people found work across those two months than initially reported.4 

The Institute for Supply Management announced a slight November downturn in its manufacturing PMI; the 0.3% retreat took it to 58.7, still indicating strong expansion for the sector. (Overall hard goods orders also retreated in November, down 0.7%; economists polled by MarketWatch projected a 3.3% gain.) ISM’s service sector PMI jumped 2.2 points north in November to 59.3.2,3

Inflation pressure? There wasn’t much. The headline Consumer Price Index and Producer Price Index both saw November declines – 0.3% for the CPI, 0.2% for the PPI. Year-over-year, the CPI had only advanced 1.3%, the PPI 1.4%. (The core CPI was up 1.7% yearly, the core PPI up 1.8% in 12 months.)2,3

In mid-December, Congress voted to retroactively reinstate more than 50 tax breaks that had expired at the end of 2013. The extenders (which included the tuition & fees deduction, the R&D credit, the state & local sales tax deduction and many others) were all set to sunset at the beginning of 2015 barring further legislative action.5

December ended with more uncertainty for Greece (and the European Union). The Greek parliament dissolved, unable to select a new president; the Syriza party looked poised to win the resulting national election. It had long protested anti-austerity conditions handed down as part of the bailout offered to Greece by the International Monetary Fund, European Central Bank and European Commission, and had vowed to overturn much of those economic measures if it assumed power. Elsewhere on the continent, Russia’s economy looked headed for recession; government economists put 2014 GDP at 0.6% and projected 2015 GDP at -0.8%. By the end of 2014, the ruble had sunk 50% versus the dollar.6,7

As for the broad EU, its jobless rate stood at 10.0% as the year wrapped up (with unemployment in the 18-country euro area at 11.5%), and its annual inflation rate stood at just 0.3% in December. In the U.K., inflation touched a 12-year low last month.8,9

Important indicators on foreign factory output and GDP were mostly disappointing. As December ended, the latest HSBC/Markit manufacturing PMI for China came in at 49.5; readings below 50 signal sector contraction. China’s State Information Center put the country’s Q3 growth at 7.3% (down from 7.5% in Q2) while forecasting 7.0% GDP for 2015. The Markit Composite Flash PMI for the eurozone moved up to 51.7 in mid-December; just prior to that, it had been at 51.1, a 16-month low.9,10

European and Latin American bourses took widespread losses in December. Was it any surprise that Russia’s RTS index fell hardest? Its 18.84% monthly drop topped the 14.22% decline of Greece’s ATG. Other European losses last month: DAX, 1.76%; CAC 40, 2.67%; IBEX 35, -4.56%; FTSE 100, -2.33%; STOXX 600, -1.36%. Ireland’s ISEQ was an exception, up 3.02% last month. Europe’s best 2014 performer was Turkey’s BIST 100 index, which went +26.43%. Argentina’s MERVAL sank 12.54%, Mexico’s IPC All-Share 2.36% and Brazil’s Bovespa 8.52%; in Venezuela, the Caracas General index soared exactly 29% in December. The MERVAL was the top performer for the Americas in 2014, going +59.14%.11

The picture in the Asia Pacific region was somewhat better. The winner for the month and the year: the Shanghai Composite. It gained 20.57% in December and 52.87% for the year (its A Shares actually advanced 53.06%). The Sensex lost 4.16% in December, the KOSPI 3.29% and the Hang Seng 1.59%, yet the KSE 100 rose 2.99%, the Jakarta Composite 1.50% and the S&P/ASX 200 1.84%. Japan’s Nikkei 225 was virtually flat, losing 0.05%.11

Now to the Dow Jones and MSCI benchmarks. The Europe Dow dipped 5.30% in December, the Dow Jones Americas just 0.76%; the Asia Dow was off 2.67%, the Global Dow 2.71%. The twin MSCI indices staged December retreats – the MSCI World lost 1.71%, the MSCI Emerging Markets 4.82%.11,12


Call 2014 the year of the strong dollar and weak oil. The U.S. Dollar Index gained 2.18% more in December, moving up to 90.29 on New Year’s Eve. Oil’s catastrophic 2014 ended with an 18.25% December loss; WTI crude went -45.42% on the year with a barrel worth just $53.27 on the floor of the NYMEX as the final trading day of 2014 concluded. Other major energy futures racked up big monthly losses, too. Unleaded gasoline slid 22.17% to bring its 2014 retreat to 47.03%. Natural gas fell 28.65%, heating oil 16.02%. Crops had a mixed month: sugar lost 6.50% and coffee 9.90%, but soybeans rose 0.54%, corn 5.77%, wheat 1.86% and cotton 3.16%.13,14

Last month was actually decent for metals. Gold ended 2014 at $1,184.10 on the COMEX with futures advancing 1.44% in December. Still, it declined 1.23% for the year. Silver rose 1.43% in December, platinum 0.58%; copper futures lost 1.12%.14

The housing market lost some momentum in November, even as interest rates for conventional mortgages stayed below 4%. The National Association of Realtors reported existing home sales dropping 6.1% in that month; the Census Bureau found new home sales down 1.6%. It was just the second retreat in eight months for resales, and the first decline in the pace of new house purchases since July. November’s 20-city Case-Shiller home price index showed a 4.5% annual advance.2,3,17

Looking at the near future, NAR’s pending home sales gauge managed to rise 0.8% in November, which was its best performance in 14 months. Groundbreaking tailed off for the first time in three months in the eleventh month of the year: housing starts fell 1.6%, with the issuance of building permits down 5.2%.15,16

Freddie Mac’s last 2014 Primary Mortgage Market Survey (December 31) showed the average interest rate for the 30-year FRM at 3.87%, a tenth of a percent below where it was in the November 26 edition of the survey. Between those two dates, mean rates on 15-year FRMs declined from 3.17% to 3.15% and mean rates for 1-year ARMs declined from 2.44% to 2.40%. Average rates on 5/1-year ARMs were unchanged at 3.01%.17

The Dow, S&P 500 and NASDAQ all posted slight December declines. Closing values from December 31 for the big three: DJIA, 17,823.07; NASDAQ, 4,736.05; S&P, 2,058.90. Oil’s winter tumble helped the CBOE VIX advance hugely – it ended the year at 19.20, with a monthly gain of 44.04% and a yearly gain of 39.94%. The Russell 2000 settled at 1,204.70 on December 31, rising 2.68% on the month and gaining 3.53% for 2014.11
















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Sources:,, - 12/31/1411,18,19,20 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.

For the last couple of years, stocks have surpassed expectations. Will they do so this year? Will corporate earnings be strong enough to generate another double-digit advance for the S&P? If the Fed times its moves right, the bull market could hold up nicely. Oil and Russia present two wild cards for the coming quarters. What if the world’s need for oil has peaked, and demand is never as high as it once was? What if the plummeting ruble and the seeming freefall of oil futures send Russia (in the worst-case scenario) toward a debt default? Can U.S. equities adequately withstand such potential shocks? Major questions, but it is worth reflecting on the major economic and geopolitical question marks confronting stocks in the past few years – all of which the bulls eventually ran past. Perhaps 2015 will surprise the analysts once again.