Not surprisingly, I have been thinking a lot about my annual Investment Outlook (due out in about a week) of late. It’s a great opportunity for me to look at the “big picture” overall and at the major themes that we should be following in the markets as 2015 opens. The overall picture seems very bright indeed. The U.S. economy has continued to improve, if not as quickly as we all would want. GDP has remained in the 2-2.5 percent range with some recent signs of quickening growth. Inflation has dipped below 1 percent, largely thanks to the tanking of oil prices. The unemployment rate, 7.9 percent in 2012 and 6.7 percent in 2013, dropped below 6 percent in 2014. The economy is doing pretty well in the aggregate.
Stocks were up solidly again in 2014, if not by as much as in 2013, continuing a mostly uninterrupted upward run since March of 2009. The Dow ended the year up 7.52 percent while the Nasdaq and the S&P 500 rose 13.40 percent and 11.39 percent (13.7 percent if dividends are included), respectively, for the year. The S&P is now up an average of 20.7 percent a year for the last three years including dividends, its best three-year return since the late 1990s.
Meanwhile, the bond market performed well too. Whether we’re looking at bonds in the aggregate (AGG was up 6.00 percent on the year) or at various component parts (LQD, representing corporate bonds, produced an 8.2 percent return, while EDV, a decent proxy for long-duration U.S. Treasuries, gained a whopping 45.10 percent in 2014), fixed income had a pretty good year too. Commodities (especially oil, obviously – after hitting a peak around $107 a barrel in June, U.S. crude oil futures finished the year at $53.27) did very poorly, while European stocks and emerging markets were spotty, but that’s mostly quibbling.
More broadly (as Steven Pinker, among others, persuasively argues), in many ways the current world is a huge improvement over what came before. Statistically speaking, tribal warfare was nine times as deadly as war and genocide was even in the 20th century, despite its concentration camps, gulags and killing fields. The murder rate of Medieval Europe was more than thirty times what it is today. Slavery, excessive and sadistic punishments, as well as frivolous executions were unexceptionable features of life for millennia, but are quickly disappearing today (if not nearly quickly enough). Wars between developed countries have all but vanished, and even in the developing world, warfare kills but a fraction of the people it did just a few decades ago. Rape, assault, hate crimes, deadly riots, child abuse and more are all substantially less common than they once were. Hunger has been halved in the developing world since 1990. Disease is waning dramatically, allowing most of us to live longer. Things are a long ways from perfect and plenty of problems exist, but the overall picture isn’t half-bad. Not many of us would jump at the chance to switch places with those who lived during other times or eras.
All of which brings me to yesterday. Continue reading