Crude Thoughts
The themes that we ended 2014 with remain well in pace as we start the New Year. From that perspective, we think it prudent to review the best and weakest performing asset classes and consider whether lightning can strike twice for many of these securities. As the returns table below illustrates, it was another strong year for U.S. investors with both the fixed income and equity markets adding onto returns that have been accumulating for the past five years. The fixed income market was primarily driven by the 80-120 bps decline in the intermediate to long end of the yield curve, despite the ending of QE III and the growing expectations for increased short term rates in 2015. The curve subsequently flatted 150 bps from a 2s vs 30s perspective as 30 yr yields fell 120 bps on the year while two-year yields were almost 30 bps higher. As a result longer duration drove the strongest outperformance, with long treasuries gaining over four times more than the aggregate, while preferred and taxable municipals also generated significant levels of excess returns. The reach for yield created by collapsing global rates had its limitations though, with safer credits outperforming riskier names for the first time in five years, making high yield the weakest performing bond asset class in 2014 from an absolute and risk adjusted perspective. U.S. equities also posted some of the strongest global gains as the global growth concerns were centered away from North America, as the 5% 4Q:14 GDP was the strongest in over a decade. Equity performance also had a somewhat risk adverse bent, with utilities, healthcare, IT, financials and staples posting the strongest yearly gains.
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