End-of-Year Bears Spoil S&P 500 Rally

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The S&P 500 erased its gains for December on the last day of 2014, as soft economic data brought greater uncertainty over America’s economic recovery.

The index of American stocks fell 1% by the end of trading, ending the year up over 11%, while the Dow Jones Industrial large-cap index lost 0.9%. Volumes were 25% below recent averages, indicating light activity in the market.


The S&P 500 erased its gains for December on the last day of 2014, as soft economic data brought greater uncertainty over America’s economic recovery.

The index of American stocks fell 1% by the end of trading, ending the year up over 11%, while the Dow Jones Industrial large-cap index lost 0.9%. Volumes were 25% below recent averages, indicating light activity in the market.

Some analysts dismiss the sell-off as the result of portfolio managers liquidating holdings, but the S&P has not seen a negative December since 2007. The hardest hit sectors were utilities and technology, both falling well over 1%. Meanwhile, volatility as measured by the CBOE Volatility index known as the VIX rose 21% to 19.2, well above the recent average of 13.

Federal Reserve Rate Speculation

Many analysts believe the Federal Reserve will begin raising interest rates in 2015, which will pressure stock price growth as risk-averse investors move away from the market and into U.S. Treasuries. An economist at Barclays predicts that the Fed will raise interest rates in June, although analysts at other investment banks are expecting a later action.

A minority of analysts believe there will be no raise at all, as low oil prices keep inflation fears at bay. Oil lost over 40% of its value in 2014, and low energy costs are keeping inflation well below the 2% target that the Federal Reserve has set. At the same time, the stronger U.S. dollar, which rose 11% in 2014 relative to major foreign currencies, is also making imports cheaper for U.S. consumers.

Some analysts believe that the strong U.S. dollar is the result of lower liquidity in emerging markets, which are commodity-dependent and particularly hard hit by falling oil prices. Additionally, disinflationary trends in China combined with high inflation and political instability in Latin America, Ukraine, and Russia are encouraging a flood of capital into the United States, strengthening the dollar even further.

With a strong dollar and low energy costs, most analysts believe the rate of inflation, which fell steeply in the second half of 2014 from 2% to 1.1% in December by some projections, will likely stay far below target. Already, consumer confidence has risen to its highest point since the financial crisis, which many economists believe is a result of lower energy prices causing a rise in discretionary purchasing power.

The personal consumption expenditure, which has been the focus of the Federal Reserve’s monetary policy, expects to have risen 0.5% in December, far below the 1.4% rise in November.

Wage Focus in 2015

Analysts are also predicting robust wage growth, which combined with lower energy costs and a strong U.S. dollar, will create a rise in the cost of services, which in turn will push inflation higher.

The hopes for wage gains reside on the believe that higher salaries will come with lower unemployment, but a recent report by the Labor Department showed that jobless claims rose 6% in the last week of 2014, far worse than expectations. If unemployment continues to rise, wage growth is unlikely, and deflationary pressures could bring equity price growth down even further.

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