Imagine if I’d told you, one year ago, that 2014 would include all of the following: soaring Treasury bond prices, a collapse in global commodity prices, a rise in civil unrest, the largest Ebola outbreak in history, and the viral transmission of Kim Kardashian’s hideously massive derriere.
At the least, you would’ve guessed that the stock market was going to crash. More likely, you would’ve thought the end of the world was upon us.
But you would’ve been wrong.
Impending doom was deferred by major stimulative forces, including the legalization of marijuana in several states, the unveiling of the Apple Watch, and the appointment of Janet Yellen as Chair of the Federal Reserve.
But all joking aside, 2014 reminded many of the period preceding World War II, when Germany won the Olympics held in Berlin and later went on to annex Czechoslovakia.
Last year, Russia won the medal count in the Sochi Winter Olympics and annexed the Ukrainian peninsula of Crimea soon after. The Ukrainian hryvnia also lost the most value of any paper currency in 2014, falling nearly 50% (relative to the U.S. dollar).
Amazingly, though, the hryvnia wasn’t the worst-performing currency in 2014. That dubious distinction belongs to digital currency Bitcoin, which collapsed by nearly 60%.
With 2014 in the history books, let’s take a look at how various financial assets and investments performed last year…
The best-performing stock in the S&P 500 this year was Southwest Airlines (LUV), with a 126% advance. Meanwhile, the worst performer was deepwater driller Transocean (RIG), with a 60% decline, including dividends.
Utilities proved to be the best-performing U.S. sector and, unsurprisingly, energy was the worst sector.
Small-cap stocks trailed their large-cap brethren since the end of the first quarter. The iShares Russell 2000 ETF (IWM) returned 5% for the full year.
International stocks as a whole didn’t fare as well as U.S. equities. The iShares MSCI EAFE (EFA), a proxy for stock markets in developed nations, returned -6%.
Emerging markets, meanwhile, were a mixed bag in 2014. China’s Shanghai Composite rocketed 50% higher, posting the best performance of any global equity index. India’s Sensex also surged around 30%.
On the other hand, Greece’s Athex Composite fell 38%, and Russia’s RTS Index was the worst-performing global equity index, plummeting over 40%.
Due to the bifurcation of emerging market returns, the iShares MSCI Emerging Markets ETF (EEM) returned just –4%.
Most commodities came under pressure in 2014, with the CRB Commodity Index falling to its lowest level in over five years.
It was certainly a painful year for oil bulls as the massive, net-long speculative futures position in crude oil continues to unwind. The United States Oil ETF (USO) fell 42%.
It wasn’t all bad, though, as a few commodities, such as live cattle and palladium, rose. Coffee was the best-performing commodity, after a brutal bear market lasting from 2011 through 2013. The iPath DJ-UBS Coffee Sub-Index ETN (JO) rose 40% in 2014.
Gold was relatively unchanged, which was surprising considering the carnage in much of the commodity complex. The popular SPDR Gold Trust (GLD) declined 2.2% for the full year.
As with commodities, fixed-income securities had an interesting year.
The iShares iBoxx High Yield Corporate Bond ETF (HYG) declined on a price basis, but eked out a 1.9% gain on a total return basis.
Investment-grade corporate bonds had a stronger showing in 2014 than high-yield bonds. The iShares iBoxx Investment Grade Corporate Bond ETF (LQD) produced an 8.2% total return.
However, bonds without credit risk were the big fixed-income winners in 2014. Using the Vanguard Extended Duration Treasury ETF (EDV) as a proxy, Treasury bonds soared 45% last year.
The performance of 30-year Treasuries was certainly a surprise for me, even though I was one of the few to advocate a position in intermediate-term Treasuries in 2014.
From a risk-adjusted return perspective, 10-year Treasuries were perhaps the best-performing major financial asset in 2014.
Going forward, I think the so-called “belly” of the Treasury curve – maturities around five years – offers a more-attractive risk-reward relationship. But remember, I’m a big believer of investing in the underlying Treasury securities rather than Treasury ETFs.
Oh, and if you haven’t done so already, don’t forget to rebalance your entire portfolio.
For most, this will entail taking profits in domestic stocks and adding exposure to foreign stocks.
A properly diversified portfolio is always going to have holdings that you feel uncomfortable about or wish you hadn’t owned, and international equities certainly fall into this category heading into 2015.
Safe (and high-yield) investing,
Alan Gula, CFA