Fourth Quarter 2014: Oil Drowns
2014 closed with the sharply declining price of oil dominating headlines and awakening volatility in global equity markets.
In the fourth quarter, crude prices fell more than 50% from their summer highs. Oil’s decline caused a flight to quality, benefiting the US dollar as well as US equities and Treasury bonds. Oil exporters were correspondingly harmed. Russia, which had grown to the world’s fifth largest economy after years of oil exports at high prices, was among the hardest hit as the ruble tumbled, forcing the Bank of Russia to hike its interest rate by 6.5% to 17% overnight to stem the free fall.
Domestically, lower prices at the pump, higher employment, and increased consumer confidence were welcome signs for domestic consumers, who recorded higher-than-expected spending during the holidays. This higher consumption helped rally the market as small-cap names outgained their larger counterparts in the fourth quarter.
US third-quarter GDP growth was revised upwards to an annualized 5.0%, its highest reading in 11 years. This robust expansion resulted in declining unemployment levels, while wage growth remained tepid. Internationally, however, the economic situation remains bleaker, with both the Eurozone and Japan struggling to find the right mix of policies to deal with accumulated debt and stagnant economies. The uncertainty abroad and strong domestic economy helped push down US Treasury rates and push up the value of the US dollar, which reached a 9-year high against the Euro.
Quietly, the Federal Reserve exited its third round of quantitative easing without a repeat of 2013’s “taper tantrum.” Janet Yellen remained vague in her statements about possible rate hikes, but the low energy prices should help subdue political pressure to tighten.