At this time last year we presented data about the performance of the stock market in the year following a substantial surge in stock prices the previous year. 2013 was the 6th best year for stocks since 1952, with the S&P 500 gaining 29.6% that year. Our research showed that in the years following an index gain of 20+%, the market had a subsequent positive year over 80% of the time. We can now add 2014 to that list which leads us to question what has happened in the second year following a 20+% return in the S&P 500. Despite the plethora of prognostications we hear this time of year, no one knows for certain what 2015 will bring for investors, but the data reveals the market advanced over 62% of the time in the second year. In addition, history may be on our side as the year before a Presidential election is usually positive.
One of the most pleasant surprises of 2014 was the substantial drop in gasoline prices, which resulted from the 50% drop in the price of oil. The chart to the bottom of the Dashboard shows the average retail gasoline prices over the last 5 years. We have mentioned many times that US oil production has soared in recent years due to new technologies that unlocked vast reserves in shale formations around the country. The result has been a significant price decline at the pump. Analysts estimate that each penny decline in the price of gasoline results in $1 billion in new purchasing power.
We don’t know if these low prices will persist as the supply and demand for oil adjust to the new reality of American production, but current prices are a far cry from the $3.50 per gallon that has been the norm for so many years.
Economic growth has picked up noticeably in the latter half of 2014, with third quarter gross domestic product growth running at a 5% annualized rate, the best reading since 2000. Lower energy prices and improving confidence have buoyed consumer spending, which generates about two thirds of GDP.
Thank you again for your trust and confidence in our firm. We look forward to a happy and prosperous New Year and wish you all the best for 2015!