Despite a bumpy ride throughout 2014, the US economy gained pace
while the US equity and fixed income markets outperformed most markets
around the world. This performance came with higher market volatility in
the US, a rallying dollar, slowing economies in Europe and Asia, and rising
geopolitical tensions, including conflicts in Ukraine and the Middle East.
2014 Review:
Economy & Markets
January 2015
e Dow Jones Industrial Average rose for the sixth straight
year, posting a 7.52% gain (price-only return). e S&P
500 Index rose 13.69% (including reinvested dividends),
marking the third straight year in which the benchmark
has returned more than 10%. e Dow closed at a record
high on 38 calendar days, while the S&P 500 had 53 record
closes. e non-US markets followed a much dierent track:
All major indices logged negative performance for the year
(in USD). e MSCI EAFE Index had a -4.90% return and
the MSCI Emerging Markets Index a -2.19% return (net
dividends, in USD). e dollar’s strong performance relative
to major regional currencies contributed signicantly to the
lower returns for US investors.
Government bond yields fell across major markets,
including the US, where many expected higher rates in
response to improving economic growth and an eventual
rate increase due to the end of quantitative easing by the
Federal Reserve. e yield on the 10-year Treasury note
declined to 2.17% by year-end, down from 3.03% in 2013,
with lower prices boosting its return to over 4.0% for the
year. e Barclays US Government Bond Index returned
4.92%. World government bonds had slightly positive
returns: e Citigroup World Government Bond 1–5
Year Index (hedged) returned 1.90%.
OPENCIRCLE WEALTH PARTNERS
2
e chart above highlights some of the year’s prominent
headlines in the context of broad US market performance,
measured by the Russell 3000 Index. ese headlines are
not oered to explain market returns. Instead, they serve
as a reminder that investors should view daily events from
a long-term perspective and avoid making investment
decisions based solely on the news.
e chart below oers a snapshot of non-US stock
market performance (developed and emerging markets),
measured by the MSCI All Country World Index ex USA.
Again, the headlines should not be viewed as determinants
of the markets direction but only as examples of events
that may have tested investor discipline during the year.
5000
5400
5600
5800
6000
5200
Annualized returns
as of December 31, 2014
1 Year 12.56%
3 Years 20.51%
5 Years 15.63%
10 Years 7.94%
US Stock Market Performance
Russell 3000 Index with selected headlines from 2014
Source: Russell Investment Group.
Past performance is not a guarantee of future results. In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
“Senate Confirms
Yellen for Fed”
“Industrial Production
Notches Strongest
Yearly Gain since 2010”
“US Stocks
Slide as
Jitters Persist”
“Corporate Profits
Hit New High as
GDP Revised Up”
“Bond Investors
Still Waiting for
Yields’ Rise”
“Private Employment Hits a New High,
but Government Hiring Lags”
“Housing Slow to
Take Off in Spring”
“US Considers
Lifting Crude
Oil Export Ban”
“Bond Rally
Takes Yields
to 2014 Lows”
“Fed Officials Signal
that Rates to Stay
Low for Long Time”
“Home Builder
Optimism Hits
Six-Month High”
“Consumer
Rebound
Chugs Ahead”
“US Bank
Profits Near
Record Levels”
“Unemployment Claims
Hit Eight-Year Low”
“US, EU Widen
Sanctions on Russia”
“US-Led Airstrikes
Aid Syrian Kurds,
Target Islamic State
Oil Assets”
“Gold Prices
Fall to Four-
Year Low”
“Mortgage Rates Tumble”
“Fed Closes Chapter
on Easy Money”
“Soft New-Home
Sales Weigh
on Recovery”
“Oil Prices Tumble
to Five-Year Lows”
“US Restores
Cuba Ties in
Historic Deal”
“US Economy
Posts Strongest
Growth in More
Than a Decade”
“Dollar Ends Best
Year in More
than a Decade”
Source: Russell Investment Group.
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term
perspective and avoid making investment decisions based solely on the news. Past performance is not a guarantee of future results. In US dollars.
Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
US Stock Market Performance
Russell 3000 Index with selected headlines from 2014
“China’s
Economic
Growth
Slows
to 7.7%”
“Ukraine Seeks
International Bailout”
“Russia’s Putin
Signs Treaty
to Annex Crimea”
“China Cracks
Down on Bitcoin”
“Greece to
Sell First
Long-Term
Bonds since
Bailout”
“Emerging Markets
Rally—Investors
Return to Assets
Shed in Winter Slide”
“Doubts Rise on
Europe’s Recession Exit”
“ISIS Declares New
Islamist Caliphate”
“NATO Ramps Up Its
War of Words
with Russia”
“Argentina Dances
with Default”
“Israel Says
it is Escalating
Gaza Campaign”
“Weak Growth
Puts Europe at
Economic Crossroads”
“Ebola Virus Crisis
Worsens for Lack
of Global Help”
“Eurozone
Inflation
Remains at
Record Lows”
“Scotland Rejects
Independence
Vote”
“European
Bonds Go
Negative”
“Global Oil
Glut Sends
Prices Plunging”
“Japan Weighs More
Stimulus after Falling
into Recession”
“Russia Moves to Help Sinking Ruble”
“Japanese Bond
Yields Hit
Historic Low”
“Chinese Stocks
and Dollar Were
Stars, Oil Big
Loser in 2014”
215
210
205
200
195
190
185
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Non-US Stock Market Performance
MSCI All Country World Index ex USA with selected headlines from 2014
Source: MSCI.
Past performance is not a guarantee of future results. In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
Annualized returns
as of December 31, 2014
1 Year -3.87%
3 Years 8.99%
5 Years 4.43%
10 Years 5.13%
Source: MSCI.
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term
perspective and avoid making investment decisions based solely on the news. Past performance is not a guarantee of future results. In US dollars.
Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
Non-US Stock Market Performance
MSCI All Country World Index ex USA (net div.) with selected headlines from 2014
OPENCIRCLE WEALTH PARTNERS
3
ECONOMIC BACKDROP
Accelerating US Recovery
e economy showed signs of weakening in early 2014,
with Q1 GDP growth reported at an annualized -2.9%.
In Q2, GDP rebounded strongly at a 4.6% annual growth
rate (seasonally adjusted)—the highest since 2003. Growth
in Q3 was even stronger at 5%, capping its best six-month
stretch since 2003 and reaching the highest annualized
growth rate in 11 years. If the Feds Q4 estimates hold,
2014 GDP growth will have been in the 2.4% range.
A host of indicators pointed to improving conditions
during the year, including:
Employment—e US economy added 2.7 million jobs
through November, the best employment growth in 15
years. Claims for jobless benets ran lower than at any
point since 2000. By year-end, the US had recovered all
jobs lost to the past recession, and joblessness was at a
six-year low. Despite the lowest labor force participation
rate since the 1970s, the economy entered 2015 with
record employment.
Manufacturing—Economic activity in the manufacturing
sector improved throughout most of 2014. e Institute
for Supply Management (ISM) reported its purchasing
managers index (PMI) at 59.0 in October, 58.7 in
November, and 55.5 in December. (A reading above
50% indicates general expansion.) For the year, the PMI
averaged 55.8, the best reading since the rst full year
aer the recession in 2007–09.
Consumer spending—An improving labor market
and lower energy prices translated into higher income
and purchases among American workers. Real personal
consumption expenditures increased at a seasonally
adjusted 3.2% rate in Q3, compared to 2.5% in Q2. US
equity market gains over the past three years have added
$7 trillion to household wealth, which many believe has
helped fuel spending.
Company earnings—e Department of Commerce
reported a 2.8% rise in US corporate prots in Q2,
followed by a 5.1% increase in Q3, marking 12 straight
quarters of year-over-year growth. According to GDP
data, Q2 aer-tax prots hit a record high. However,
aer adjustments for depreciation and inventory changes,
prot margins—particularly among smaller companies—
appeared to be declining due to rising labor costs and
capital expenditures.
Declining Oil Prices
Oil prices fell by almost half during 2014, a victim of excess
supply due to rising production—particularly in the US,
where production soared to its highest level since 1986—
and to weakening demand from the economic slowdown
in Europe and Asia. In the US, prices dropped from $107
per barrel in June to just over $53 at year-end. For the year,
Brent crude was down 48% and West Texas Intermediate
crude down 46%. e price decline most aected the
economies and currencies of oil-exporting countries,
especially Russia.
Soaring Dollar
In 2014, the US dollar rose against every developed markets
currency. Overall, it gained 12.5% against a basket of widely
traded currencies, measured by the Wall Street Journal
dollar index. is was the dollar’s best gain since 2005
and second-best on record. e rise was attributed to
stronger US economic data, falling global oil prices,
expectations of higher interest rates, and weakened
currencies resulting from monetary easing by the
Japanese and European central banks.
Weak Inflation
Despite rising to an 18-month high in May and June (2.1%
each), average US ination remained low throughout 2014.
In November, year-over-year ination fell to 1.3%. Since
rising ination is normally viewed as a sign of an economic
uptick, some believe that weak ination inuenced the
Feds decision to not raise interest rates. Across the worlds
largest economies, ination eased for the sixth straight
month in November, with the Organization for Economic
Cooperation and Development (OECD) reporting average
annual ination for its 34 members at 1.5%.
OPENCIRCLE WEALTH PARTNERS
4
2014 INVESTMENT OVERVIEW
Market Summary
e US equity markets—and particularly the large cap
segment of the market—logged a strong year. e S&P
500 Index returned 13.69%; the NASDAQ Composite Index
gained 13.40%; and the Russell 2000, a popular benchmark
for small company US stocks, returned 4.89%. US market
volatility, measured by the Chicago Board Options Exchange
Market Volatility Index (VIX), increased to its highest level
in two years, with most activity occurring in Q3. Average
volatility for the year, however, was the lowest since 2006.
Non-US developed stock markets experienced negative
performance across almost all major indices (references
in USD). e MSCI World ex USA Index, a benchmark
for large cap stocks in developed markets outside the
US, returned -4.32%. e small cap and value versions
of the MSCI EAFE index returned -4.95% and -5.39%,
respectively. Emerging markets proved no exception,
with the MSCI Emerging Markets Index returning -2.19%
and the value subindex returning -4.08%. e small cap
subindex returned 1.01%.
Among the equity markets tracked by MSCI, more than
half of the countries in the non-US developed markets
index had negative total returns and the range of returns
was broad. e top three return countries were Israel
(22.77%), New Zealand (7.34%), and Denmark (6.18%).
Countries with the lowest returns were Portugal (-38.24%),
Austria (-29.77%), and Norway (-22.04%).
In emerging markets, 13 of 23 countries tracked by MSCI
logged negative total returns and the dispersion of returns
was broader. Egypt (29.33%), Indonesia (26.59%), and the
Philippines (25.59%) were the top-performing countries in
the index. e lowest returns in the index came from Russia
(-46.27%), Greece (-39.96%), and Hungary (-27.44%).
Returns of major xed income indices were positive due
to falling yields and rising prices. One-year US Treasury
notes returned 0.18%, US government bonds 4.92%, world
government bonds (1–5 years USD hedged) 1.90%, and
US TIPS 3.64%.
Real estate securities had a banner year: e Dow Jones US
Select REIT Index returned 32.00%, and the S&P Global
*Annualized.
Past performance is not a guarantee of future results.
In US dollars. Indices are not available for direct investment.
Performance does not reflect the expenses associated with
management of an actual portfolio.
Three
Months
One
Year
Three
Years
US Equity Returns (%)
Non-US Equity Returns (net div.) (%)
Fixed Income Returns (%)
Index
Russell 3000
Russell 2500
Russell 2000
Russell 2000 Value
Russell 2000 Growth
Russell 1000
Russell 1000 Value
Russell 1000 Growth
S&P 500
5.24
6.77
9.73
9.40
10.06
4.88
4.98
4.78
4.93
12.56
7.07
4.89
4.22
5.60
13.24
13.45
13.05
13.69
20.51
19.97
19.21
18.29
20.14
20.62
20.89
20.26
20.41
Three
Months
One
Year
Three
Years
Index
MSCI EAFE Small Cap
MSCI World ex USA
Small Cap
MSCI EAFE
MSCI World ex USA
MSCI EAFE Value
MSCI World ex USA
Value
MSCI EAFE Growth
MSCI World ex USA
Growth
MSCI Emerging Markets
MSCI Emerging Markets
Small Cap
MSCI Emerging Markets
Value
-2.27
-3.38
-3.57
-3.69
-4.85
-5.17
-2.29
-2.22
-4.50
-6.02
-6.44
-4.95
-5.35
-4.90
-4.32
-5.39
-5.41
-4.43
-3.26
-2.19
1.01
-4.08
13.83
11.77
11.06
10.47
11.04
10.46
11.03
10.43
4.04
7.65
1.79
Three
Months
One
Year
BofA Merrill Lynch
Three-Month US Treasury Bill
BofA Merrill Lynch 1-Year
US Treasury Note
Citigroup World
Government
Bond 1-3 Years (hedged)
Barclays US
Government Bond
BofA Merrill Lynch 1-5 Year
US Treasury and Agency
Citigroup World Government
Bond 1-5 Years (hedged)
Barclays US TIPS
0.00
-0.07
0.22
1.86
0.48
0.47
-0.03
0.04
0.18
0.96
4.92
1.24
1.90
3.64
0.07
0.23
1.03
1.40
0.68
1.54
0.44
*
*
Three
Years
*
Three
Years
*
Other Returns (%)
Dow Jones US Select REIT
S&P Global ex US REIT (net div.)
Bloomberg Commodity Total Return
Three
Months
One
Year
15.09
2.98
-12.10
32.00
10.94
-17.01
16.10
14.42
-9.43
Major World Indices
As of December 31, 2014
OPENCIRCLE WEALTH PARTNERS
5
ex US REIT Index returned 10.94%. Commodities were
negative for the fourth year in a row, with the Bloomberg
Commodity Total Return Index returning -17.01%. Brent
crude oil and gasoline futures were the worst performers in
the index, posting -48.3% and -48.5% returns, respectively.
Natural gas fell 31.7%. Gold was down for the second year
in a row, falling 1.5%; silver prices were down 19.5%. Coee
was the top-performing commodity in the index at 50.5%.
Diverging Returns
While US equity returns were high relative to those of
other regional markets, returns within various US market
segments diverged. Based on the respective Russell
1000 and 2000 indices, US large cap stocks signicantly
outperformed small cap stocks, and within the relative price
dimension, large value slightly outperformed large growth.
Among small cap stocks, growth outperformed value.
In the non-US developed markets (based on the MSCI
indices in USD), all segments had negative performance.
Negative returns among large and small caps stocks were
similar, while large growth slightly outperformed large
value. In the emerging markets, small cap, which had a
slightly positive return, outperformed large cap, and growth
outperformed value, although both returns were negative.
e mixed results of the size and relative price dimensions
in 2014 were not unusual from a historical standpoint.
Although small cap and value stocks have oered higher
expected returns relative to their large cap and growth
counterparts, these return premiums do not appear
each year. For example, since 1979, US small caps have
outperformed large caps in 19 of the 36 calendar years—
or 52% of the time. Results are similar for the relative
price dimension: Since 1979, value has outperformed
growth in 20 calendar years—or 55% of the time. Small
cap value has outperformed large cap growth in 58% of
the calendar years.
History also has produced multiyear periods in which small
caps and value did not outperform large caps and growth.
Noteworthy periods include 1984 to 1987 and 1994 to 1998,
when small caps underperformed large caps, oen by a wide
margin each year. Since 1979, the value premium has also
experienced extended periods of underperformance—and,
in some cases, the dierential exceeded 15% margin. e
Past performance is not a guarantee of future results. In US dollars.
Indices are not available for direct investment. Performance does not
reflect the expenses associated with management of an actual portfolio.
Dow Jones US Select REIT
S&P 500
Russell 1000 Value
Russell 1000
Russell 1000 Growth
Russell 3000
S&P Global ex US REIT (net div.)
Russell 2500
Russell 2000 Growth
Barclays US Government Bond
Russell 2000
Russell 2000 Value
MSCI All Country World (net div.)
Barclays US TIPS
Citigroup World Government Bond
1-5 Years (hedged to USD)
BofA Merrill Lynch
1-5 Year US Treasury and Agency
MSCI Emerging Markets Small Cap (net div.)
Citigroup World Government Bond
1-3 Years (hedged to USD)
BofA Merrill Lynch 1-Year US Treasury Note
BofA Merrill Lynch
Three-Month US Treasury Bill
MSCI Emerging Markets (net div.)
MSCI World ex USA Growth (net div.)
MSCI Emerging Markets Value (net div.)
MSCI World ex USA (net div.)
MSCI EAFE Growth (net div.)
MSCI EAFE (net div.)
MSCI EAFE Small Cap (net div.)
MSCI World ex USA
Small Cap (net div.)
MSCI EAFE Value (net div.)
MSCI World ex USA Value (net div.)
Bloomberg Commodity Total Return
32.00
13.69
13.45
13.24
13.05
12.56
10.94
7.07
5.60
4.92
4.89
4.22
4.16
3.64
1.90
1.24
1.01
0.96
0.18
0.04
-2.19
-3.26
-4.08
-4.32
-4.43
-4.90
-4.95
-5.35
-5.39
-5.41
-17.01
-5 0 5 15 25 35-15
Major World Indices Ranked
by One-Year Performance (%)
As of December 31, 2014
6OPENCIRCLE WEALTH PARTNERS
same is true of small value vs. large growth stocks. In the
three-year period from 2009 to 2011, both value and small
caps underperformed. Yet, despite even extended negative-
premium periods, small caps and value have outperformed
over time, and when the premiums reversed, they oen
did so strongly and in multiple years.
Currency Impact
e strength of the US dollar had a negative impact
on returns for US investors with holdings in unhedged
non-US assets. (As a general principal, investors gain when
their home currency falls relative to the local currency of
the foreign asset they own, but lose when a rise in their
home currency reduces the value of the foreign investment
in the local currency.)
For example, in 2014, the dollars rise relative to the euro
hurt the returns of US investors in European markets.
e MSCI Europe Index (net dividends) returned 6.84%
in euros but -6.18% in US dollars. is was the case in
regions where the dollar outperformed local currencies.
Other examples: e MSCI UK Index returned 0.50% in
pounds but -5.39% in USD. e MSCI Japan Index
returned 9.83% in yen and -3.72% in USD.
For more articles, visit our website www.opencirclewealth.com
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This information is for educational
purposes only and should not be considered investment advice or an offer of any security for sale.
OpenCircle Wealth Partners is an investment advisor registered with the State of Connecticut
Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data
copyright MSCI 2013, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are
used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2013 by
Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the
expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered
investment advice or a solicitation to buy or sell securities.