At the beginning of this year, we had three broad thoughts about what it would look like. First, we expected U.S. economic growth would accelerate moderately. Second, we believed Federal Reserve tapering would occur slowly and that global monetary policy would remain accommodative. And third, we forecasted that the U.S. equity market would grind higher due to central bank liquidity, modest economic acceleration, solid corporate earnings, contained inflation and an improving fiscal situation. These views formed the basis for the predictions we made in January. And at this point, we can offer a scorecard for almost all of them:
1. 
The U.S. economy grows 3% as housing starts surpass one million and private employment hits an all-time high.
Housing starts passed one million1 and private employment hit an all-time high earlier in the year.2 But due to a sharp weather-related contraction in the first quarter, the U.S. economy did not manage to average over 3% growth.
2. 10-Year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rates near zero.
We were correct about the course of Fed policy, but low inflation, weak global economic growth and some deflation fears caused Treasury yields to fall rather than rise.
3. 
U.S. equities record another good year despite enduring a 10% correction.
We were pleased that this one came true since it was our main equity market prediction. U.S. equities had another strong year despite a 10% correction that occurred from mid-September to mid-October.3
4.
Cyclical stocks outperform defensive stocks.
Somewhat weak global economic growth and a lack of inflation helped defensive sectors to outperform. As of the end of last week, cyclicals had advanced 8.4% while defensives were up 23.3%.3
5. Dividends, stock buy-backs, capex and M&A increase at a double-digit rate.
In 2014, companies were able generate a significant amount of cash and were aggressive about using that cash in a number of shareholder-friendly ways. Dividends, buy-backs and M&A activity all accelerated at double-digit rates, and capital expenditures were approaching that level as of the end of the third quarter.4
6. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve.
The U.S. energy renaissance and improving manufacturing levels were key themes that occurred this year. Stronger U.S. growth and diverging global central bank policies helped push the value of the dollar higher over the course of 2014.3
7. 
Gold falls for the second year and commodity prices languish.
Led by energy, commodity prices trended noticeably downward this past year. The price of gold is the sole remaining wildcard for our 2014 predictions. Gold started the year at $1,201 and is currently slightly below that level.3
8. Municipal bonds, led by high yield, outperform taxable bond counterparts.
Municipal bonds performed well over the course of 2014 and easily outpaced their taxable counterparts.3 Notwithstanding some isolated credit issues, we think this asset class can continue to do well.
9. Active managers outperform index funds.
2014 was a rough year for many active managers. A handful did outperform, but the majority did not. The latest data show that only 19% outperformed their benchmarks this year, the worst performance since 2003.5
10. Republicans increase their lead in the House but fall short of capturing the Senate.
Voter dissatisfaction with the Obama administration has been rising, and Republicans made gains in both houses of Congress, capturing the Senate in the process.
Looking Ahead to 2015
Our 2015 predictions will be available in early January, but we can offer some broad themes about how the year will progress. We are expecting another good year for U.S. equities thanks to a decent economy, improving earnings, a pickup in consumer spending, low commodity prices and still-low interest rates. We are also watching some risks. Europe remains troubled by deflation issues, and it is an open question as to whether policymakers will be able to respond effectively. The volatility in energy prices could trigger credit issues and negatively affect the global financial system. And the Fed transitioning to a tighter policy stance could cause some unease among investors. But overall, we expect 2015 to be a year in which investors would do well to retain overweight positions in equities.
1 Source: U.S. Department of Commerce 2 Source: Bureau of Labor Statistics. 3 Source: Morningstar Direct, Bloomberg and Factset as of 12/19/14. 4 Source: Bloomberg, FactSet, Cornerstone Macro Research and Bank of America Merrill Lynch Global Research 5 Source: Bank of America Merrill Lynch Global Research
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
RISKS AND OTHER IMPORTANT CONSIDERATIONS
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Noninvestment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.
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