Quarterly Recap - 4^th Quarter 2014

¹ Morningstar Direct (all performance percentages are total return based, which include reinvested dividends, interest)

• The S&P 500 overcame five declines of 4% or more during 2014, posting 53 all-time highs.
• After losing 2.6% in 2013, U.S. Government Bonds rose 4.9% this year, the most since 2011.
• The Bloomberg Commodities Index sank 17% in 2014, its fourth straight annual decline.

Stocks fell 1% during the final session of the year, erasing a December gain, yet optimism over the economy, rising corporate earnings and cooperative policy from the Federal Reserve helped the S&P 500 score double-digit 2014 returns. Equity valuations were remarkably resilient despite intense market volatility, primarily driven by dire overseas events. Recall the stark headlines ranging from Russia’s incursion into Ukraine, an Ebola outbreak and renewed Middle East conflict by the ISIS terrorist army. Global valuations have been most recently challenged by the bear market in oil. Caused by burgeoning U.S. shale oil production and OPEC’s refusal to trim output, crude oil has fallen to a five-year low of $53.27 per barrel, down 40% during the quarter (-45% YTD). While the events threatened to derail the equity bull market, they were unequal to the strength in America. U.S. job growth has continued to expand and the economy surged by 5% during the third quarter, the fastest growth pace since the same quarter in 2003. The S&P 500 has advanced for an eighth quarter, the longest rally since the 14-quarter rally that ended in 1998.

Small-cap U.S. companies widely outperformed large-cap stocks during December and the quarter. The Russell 2000 Index, a broad measure of small-cap equity performance, rose 2.9% last month, surged 9.7% during the fourth quarter and finished 2014 near an all-time high, up 4.9% for the year. The Russell Mid Cap Index rose just 0.2% in December, gaining 5.9% during the quarter and nearly matched the annual performance of the S&P 500, up 13.2%.

Value outperformed growth last month, last quarter and for the year. The Russell 1000 Value Index rose 0.6% in December and 5% during the 4Q, whereas the Russell 1000 Growth Index lost 1% and rose 4.8% for the same two periods respectively. For 2014, the Russell 1000 Value Index advanced 13.5%, edging out the 13.1% return on the Russell 1000 Growth Index.

Utilities (+13.2%), Consumer Discretionary (+8.7%) and Consumer Staples (+8.2%) displayed the most strength last quarter, while Energy (-10.7%) stumbled. Utilities (+29%) also took the top prize for best 2014 sector performance, followed by Healthcare (+25.3%) and Technology (+20.1%). Telecom (+3%) gained the least, while Energy (-7.9%) was the only YTD laggard.

Developed markets outside the U.S. and Canada, as measured by the MSCI EAFE Index, continued to underperform the U.S. during the month (-3.5%), quarter (-3.6%) and year (-4.9%). For its part in the index, Europe’s STOXX 600 returned 7.9% in 2014, including dividends. The MSCI Emerging Markets Index also slumped last quarter (-4.5%), creating a 2.2% YTD loss.

The Barclays U.S. Government Bond Index rose 0.1% last month, slightly building its quarterly return to 1.9% and its 2014 advance to 4.9%. Ten-year Treasury yields fell by 18 basis points last quarter to 2.17%, extending its 2014 yield loss to 87 basis points. Below-investment grade high-yield corporate bonds lost 1.5% last month, trimming its YTD gain to 2.5%, as measured by the Barclays U.S. Corporate High Yield Index. Investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, gained 1.8% last quarter, extending YTD returns to nearly 6%. The Barclays Municipal Bond Index rose 1.4% during the 4Q, capping a 2014 surge of 9.1%.

This information is compiled by Cetera Investment Management.

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