In the 4th quarter of 2014, global equities delivered positive returns amid heightened volatility. The IMF cut its global growth estimates, and increased volatility remained a key dynamic in the fourth quarter of 2014. At one point during October, almost all global equity averages were either down or flat for the year before the majority recouped their losses. Oil continued its precipitous decline, and brought the market with it, after OPEC announced that they would not cut production. The dollar rapidly appreciated toward the end of the year, and US GDP growth was strong but fell slightly from Q3. Global divergence in growth and policy became more evident as the Fed officially ended its QE program while other central banks were simultaneously easing monetary policy.
US equities experienced their most volatile period of the year during September and October. From peak to trough all major US indexes entered correctional territory. The DJIA fell 7.5%, the S&P 500 fell 9.9%, the Russell 2000 fell about 12%, and the NASDAQ fell 10%. All indexes recovered their losses and generated positive returns for the quarter. The Russell 2000 led the way, posting a 9.35% return. The S&P 500 was the worst performing index of the quarter, posting a 4.39% return. The resilience of the markets devoid of Fed stimulus supports the argument that US economic growth is organic and strengthening.
Amidst fears that global economic growth was slowing, foreign equities as an aggregate fell during Q4. In US dollar terms, the MSCI ACWI ex US Index returned -4.19% for the quarter. Russia was hit the hardest after the crash in energy prices sparked massive depreciation of its currency and prompted debt default speculation. Europe appeared to be slowing down once again, and the European Central Bank chose not to begin all out quantitative easing. The MSCI EMU returned -4.53% for the quarter. Japan has struggled to gain traction even after postponing its second tax hike and was down -2.54%. In the emerging economies, China showed strong returns of 7.09%, building on the increased demand for and access to its equities following its partnership with the Hong Kong exchange. Overall, emerging markets were hurt by a strengthening US dollar and lower commodity prices. The MSCI EM Index returned -4.88% for the quarter.
Fixed Income continued to surprise as one of the better performing asset classes during 2014. Returns were muted during Q4, with the Barclays US AGG Bond Index returning 1.79% for the quarter. Yields on US Treasuries continued to decrease, although remaining high relative to other developed markets. Foreign investment in US bonds picked up, and it appears that global investors were seeking safe haven investments as global growth outlooks remain murky.
The Bloomberg Commodity Index fell -12.1% during Q4. Commodities continued to struggle amidst fears of slowing global growth, over supply, lack of demand, and stubbornly low inflation. Additionally, the ascent of the US dollar added further downward pressure to commodity prices. Brent Crude Oil fell nearly 40% during the fourth quarter. Gold finished the quarter slightly negative. Real estate generated strong returns during the quarter, outpacing all major indexes. The Dow Jones US Real Estate Index returned 11.17%, and the FTSE NAREIT All REITs Index returned 11.25%. Hedge funds finished the quarter virtually flat, returning 0.03%. Managed futures was the top performing strategy for the quarter, generating a 4.67% return. Directional credit was the worst performing strategy, returning -2.50% for the quarter.