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Monthly Market Update - November 2014

December 16, 2014

Summary

Global markets had a solid month with most major asset classes producing positive returns. The S&P 500 Index continued to push new highs and returned 2.7%. The second estimate of U.S. real GDP growth was revised up to 3.9%, inflation was flat for the month, and the unemployment rate remained unchanged. International stocks were outperformed by U.S. stocks with developed international large stocks rising 1.4% and emerging markets falling 1.1%. Many worried about rising U.S. interest rates when the Federal Reserve ended its bond buying program in October, but bond yields continued to fall since then with the 10-year U.S. Treasury yield ending the month 17 basis points lower at 2.18%. International bonds performed the best with a 1.4% gain while intermediate-term bonds and inflation-protected bonds had modest gains of 0.5% and 0.3%, respectively. REITs continued to reward investors with a 1.6% return. Lastly, in recent months commodities have been crushed by the sharp decline in oil prices, and that continued in November with a 4.1% decline. However, lower gas prices are a plus for the consumer and should help stimulate the economy going forward.

Economy

  • The second estimate of third quarter U.S. real GDP growth came in at 3.9%, above the 3.5% first estimate. The upward revision came from higher than expected consumer spending and business investment. Although still lower than the second quarter growth rate of 4.6%, the deceleration was largely accounted for by decreased inventory investment which is an indication of strong corporate sales. This keeps the U.S. economy on track with slow but steady growth.
  • Inflation (CPI) for the month of October was flat at 0.0%, held down by cheaper gasoline prices. Year-over-year inflation remained at 1.7%, below the Fed’s long-term inflation target of 2.0%.
  • Housing starts fell slightly from the month prior to an annual level of 1.0 million. The October housing report showed that median new home prices rose 15.4%, and existing home prices rose by 5.6% from one year ago.
  • Consumer confidence fell substantially from 94.1 to 88.7. The index still remains relatively high sitting just below highs reached in 2008.
  • The unemployment rate remained unchanged at 5.8% in November, its lowest level in six years. Employers added 321,000 jobs during the month, well above consensus forecasts of 230,000.

U.S. Equity

  • The S&P 500 Index rose 2.7% in November despite a large decline in the energy sector (-8.5%). All other U.S. large cap sector returns were positive with consumer staples (+5.5%) and consumer discretionary (+5.4%) sectors leading the pack. U.S. small stocks underperformed large stocks for the month with the Russell 2000 Index near flat.
  • U.S. large stocks have outperformed all other stock markets year-to-date as strong fundamentals (corporate earnings) supported performance.

International Equity

  • Developed international large cap stocks (MSCI EAFE Index) returned 1.4% for the month underperforming U.S. stocks. International small stocks (S&P EPAC Small Index) returned 0.7%. Australia was the only country to have a negative return (-6.3%), while the best performer was Germany with a 6.4% gain. The strength of the U.S. dollar has adversely affected stock returns for U.S. investors in developed and emerging markets year-to-date.
  • Emerging market stocks (MSCI Emerging Markets Index) were negative for the month returning -1.1%. Russia dragged down the index with a 10.8% decline.

Fixed Income

  • International bonds (JPM GBI Global ex-U.S. Hedged Index) had a great month returning 1.4%. In 2014, international bonds have been the strongest bond segment with an 8.6% return.
  • The Barclays U.S. Intermediate Government/Credit Bond Index was also positive with a 0.5% gain, and TIPS returned 0.3%.

Alternatives

  • Commodities (Bloomberg Commodity Index) dropped 4.1% in November. Energy (-10.5%) was the main reason for the decline in the index largely due to falling oil prices. Industrial metals also contributed with a 3.4% decline.
  • The S&P Global REIT index returned 1.6% for the month and is now up 21.8% year-to-date.

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar, Standard and Poor’s, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch

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