Life is full of surprises and, if you've been investing the market for a while, you're no stranger to surprises.
By any standard, 2014 was a year full of unforeseen events which violently shook the market, not just in the US, but around the world.
As 2014 draws to a close, here's a look back at some of the biggest and most dramatic shifts in the markets that almost no one saw coming.
Japan Slips into Recession
A lot of people watching the markets have heralded the sudden collapse of the Japanese economy as the failure of Abenomics. When Prime Minister Shinzo Abe came into power two years ago he was elected on the back of his plan to revive the country’s ailing economy. His heroic policy could best be described as supercharged QE, and the optimism it inspired spread very far very quickly.
The few critics who remained skeptical pointed out that the Bank of Japan had already attempted to spike real estate and stock prices with the help of uber loose monetary policy back in the 1980s, but had failed miserably. So when Japan slipped into an official recession in early November a lot of investors were caught off guard and the ripples were felt around the world. Japan is not only the world’s third largest economy but is also the United States’ fourth largest trading partner. So when the economy in Japan suffers the American recovery story faces a hurdle.
Spiking Commodity Prices
Coffee gained more than 60% in the first half of this year alone. Overall coffee prices are up 54% year-to-date. Soft commodity prices have been sharply rising throughout most of 2014 and this unexpected move in the market has been just as beneficial for investors as it has proved expensive for consumers.
The biggest story in commodities to come out over the past few years has been the shortage of cocoa. Rapidly expanding demand for chocolate and the drought in West Africa and Indonesia have meant that cocoa prices have shot up dramatically. Cocoa prices are up about 18% this past year but the bigger story is the prediction that traditional varieties of chocolate will all but disappear by 2020 and be replaced by less tastier imitations.
India’s Stock Performs the Best
After a tumultuous year in 2013 no one would have expected India to experience a shift in fundamentals so soon. The stock market in Mumbai began to steadily gain steam as the chances for a pro-business, pro-growth government began to grow. When Prime Minister Narendra Modi was elected to office in May the stock market was off to a tremendous rally that would help the benchmark NIFTY index grow by almost 35%. This makes it the single best performing market in the world this year.
US Recovery & Fed Tapering
Growth in the United States economy exceeded 3% after a relatively long time and the unemployment rate headed towards 6%, both clear signs that the country was finally picking itself out of its doldrums. The S&P 500 did suffer a few shocks along the way this year due to geopolitical tensions in Ukraine, Russia and Europe overall, but nonetheless returned close to 20% by year’s end.
Also a lot of people were surprised with bond prices as the winding down of QE didn't have the dramatic effect it was expected to. The rising dollar and falling oil prices also helped the economy grow pretty decently over 2014.
Arguably the single biggest shock the markets around the world experienced this year was the nose-dive in oil prices. As demand for oil fell steadily around the world and the US shale gas production hit new highs, the oil price was heading downward for most of early 2014 anyway. The big shock came when OPEC (Oil and Petroleum Exporting Countries) decided to hold production steady. The move was orchestrated by Saudi Arabia, who wants to drive American Shale oil producers out of business to preserve its market share. Now the question has shifted from 'Will oil prices fall?’ to 'How low will it go?'.
Over the course of the past few weeks the Russian ruble has collapsed, energy companies have seen their stock prices fall and the whole global economy is on high alert. The chances of Russia slipping into recession is seen as 75%. The price war could last a while as break even for a lot of shale oil producers in the US is estimated at $42 a barrel, while it costs Saudi Arabia only $3 a barrel to pump oil from the ground. Experts are predicting that prices could go as low as $40 a barrel. This time last year no one would have predicted this sort of volatility.
About the Author: Andrew May is the founding member of May Law, a financial law firm in Chicago. As a business and finance attorney, Andrew enjoys using his knowledge and experience to help his clients and readers make the best legal decisions about money matters in their personal and professional lives. For more info, visit www.MayLawPC.net.