Before looking at the stock markets, it is worth pointing out that the rise of the dollar complicates the picture. For the first time since the burst of the Internet Bubble, the US dollar rose in value against all major currencies. The greenback has gained 11% against the euro, 14% against the yen and 5% against the pound. The dollar index, which weights the US currency against a basket of major trading counterparts, has risen 13% during 2014. The rise of the dollar started after mid-year and is likely to continue. Investors expect US interest rates to start to rise and are moving money into the US.
The US stock markets had a reasonable year, Dow Jones went up 7%, S&P 500 11% and Nasdaq 13%. It was not as good year as 2013 but still quite a good year for many stocks. And for investors outside the US, the strong dollar made the gains significantly larger. Most experts seem to believe that US stocks will continue their upward journey but it is prudent to remember that share prices are increasing faster than profits. According to the Shiller P/E data, US shares are 64% higher valued than the historical mean value.
The Japanese stock market went up 7% during 2014, very modest compared with plus 27% in 2012 and 52% in 2013. But if the fall of the yen is taken into account, investors counting their assets in dollars, lost about 7% on Japanese stocks. The Japanese economy is likely to continue limping along, Abenomics seems to have hit the wall. This is likely to mean that the yen will continue fall which will help many Japanese companies to increase their profits. But is questionable if the increase in share prices will be enough to offset currency losses for international investors.
Europe managed to avoid disasters, the Euro did not fall apart and the crisis in Ukraine did not spread into Europe. Unfortunately, no breakthroughs were made during 2014. ECB has still not got started on quantitative easing and hasn’t done anything else which could significantly boost growth in Euroland. The politicians seem to be unable to try expansionary fiscal policies, large government debts and Brussels insisting on austerity are the main two reasons for this.
The main stock markets in Europe moved in tandem, the German, French and Italian stock markets managed all to produce slight gains. But for investors counting their returns in dollars, the returns on all three stock markets were negative, due to the falling euro. The FTSE in the UK lost two percent during 2014. In dollars, the loss was even larger.
Looking at other markets, the Danish stock market increased 21% and Indian shares with 34%. At the other end, Russian and Greek shares have taken a severe beating lately, and both markets may very well continue further south over the next couple of weeks.
How well did the experts predict the outcome of 2014? US stocks did not manage to reach the most optimistic forecasts but many predictions were relatively close to the target. Japanese stocks did not manage to live up to the expectations but after two strong years some people had expected gains to be smaller. A year ago, many experts were bullish about European stocks but the economies in Euroland still have big problems to generate growth. This also meant that many companies are struggling which can be seen in the poor performance of many European stock markets.