The global economy and markets always are good for some major surprises, but 2014 is going down as a year when the best bet was to expect the unexpected.
And for the U.S. the shocks this time around were mostly welcome: stock prices way up, interest rates still way down, gasoline the cheapest since 2009 and the domestic economy showing amazing resilience.
On Friday, a giddy Wall Street pushed the Dow Jones industrial average to a new all-time high, up 23.50 points, or 0.1%, to 18,053.71.
Here's a look at some of this year's global economic and market highlights and lowlights:
The economy that could: Despite the usual litany of obstacles, the U.S. economy closed out 2014 with its best momentum in 11 years. Real gross domestic product grew at a 5% annualized pace in the third quarter, the strongest advance since 2003, as consumer and business spending accelerated. And that was before the price of oil dived.
What's more, the surge in GDP occurred while the Federal Reserve under Chairwoman Janet L. Yellen was winding down the last of its "quantitative easing" (QE) stimulus — its monthly purchases of $85 billion in long-term bonds, a program aimed at pumping money into the economy. The final $15 billion of bonds were bought in October. So much for the doom-and-gloom camp's assertion that QE was the only thing propping up the U.S. economy.
The rest of the world that couldn't: While the U.S. economy rolled on, the rest of the world rolled over in 2014. Europe fell perilously close to another recession in the third quarter. Japan's economy actually shrank in the quarter at a 1.9% annualized rate. Russia's economy is crumbling and Brazil's is barely growing. China still is expanding at a brisk pace, but its 7% growth rate is the slowest in five years.
The reasons for the dismal data abroad vary, but the natural assumption now is that something has to give in 2015: Either the U.S. follows the rest of the world down, or the rest of the world follows the U.S. up.
"The U.S. economy likely cannot remain decoupled from the global economy indefinitely," said Don Rissmiller, economist at Strategas Research Partners in New York. But as this year showed, what's "likely" isn't necessarily what you'll get.
Saudi Dakota's holiday gift to the nation: Oil was the crash no one saw coming. U.S. shale-oil production soared, foreign producers refused to rein in their own output and much of the global economy stumbled. The result was a classic case of supply swamping demand. U.S. crude oil has plunged from $101 a barrel in mid-summer to about $55.
This will mean economic pain in the shale-oil belt, Texas and other energy-producing U.S. regions. Most Americans don't have an oil well in their backyard. But they know the difference between $4-a-gallon gasoline and $2-a-gallon gasoline is that much more cash in their pockets to drop somewhere other than at the Quickie-Mart pump.
Bond bear market still AWOL: This year began like most of the others since 2008: with the expectation that long-term interest rates finally would rise, devaluing the multitrillion dollars' worth of outstanding fixed-rate bonds in the world. And once again, the bond market had other ideas. Instead of rising, long-term bond yields in much of the world tumbled again. In Europe and Japan they hit record lows. The 10-year Germany government bond yield is at a mere 0.59%, down from 1.95% a year ago. The U.S. 10-year Treasury note yield is at 2.25%, down from 3.04% a year ago.
What this meant for average investors was another year of positive returns on bond mutual funds — their preferred haven since the 2008 financial crash — as older bonds rose in value.
Economic anemia in much of the world was the main force driving long-term interest rates lower, as many investors looking for a home for their money chose the relative safety of government bonds. It also helped that inflation in many economies continued to decline — to a fault. Indeed, the major threat now in Europe, in particular, is deflation: a broad-based, sustained decline in prices and wages. That puts the onus, once again, on the world's central banks.
Fight them at your peril, warns Ed Yardeni, economist at Yardeni Research Inc. in New York. "So far, they have indicated that they have no second thoughts about doing whatever it takes to stimulate their economies, to avert deflation and to revive inflation," he said.
U.S. stocks' bear market also AWOL: The domestic stock market proved yet again that it doesn't like being told what to do. While plenty of Wall Street pundits insisted that stocks should, and would, suffer a steep pullback, the bull market advanced into its sixth year. With three trading days left in 2014, the benchmark Standard & Poor's 500 index is up 13% for the year, piling on last year's stunning 29.6% surge. The Nasdaq composite is up 15.1% this year and the Dow is up 8.9%. Smaller stocks lagged, however, with the Russell 2000 index up a modest 4.4%.
Stocks were supported by continued growth in corporate earnings as the economy picked up speed, and by the Fed's assurance that it was in no hurry to raise short-term interest rates even though it was putting its QE stimulus program to rest. Still, there were market pullbacks in 2014 — but if you blinked, you missed them. Five times this year, the S&P 500 was hit by short-term sell-offs, only to quickly come roaring back.
See the world and see red: Staying home would have suited most American investors just fine this year, as many foreign equity markets struggled amid economic woes. A few overseas markets were catastrophes, notably Russia, down 41.5%. Elsewhere, measured in local currencies stocks are up 9.3% in Japan year-to-date, 7.3% in Canada, 4.8% across Europe, 0.6% in Mexico and 0.2% in Hong Kong, all trailing the U.S. S&P 500's gain.
But those numbers don't tell the whole story. U.S. investors abroad also suffered from the dollar's strength: As foreign currencies lose value against the buck, securities denominated in those currencies also lose value when translated into dollars. So returns for Americans in many foreign-stock mutual funds will end the year in the red. The average European-stock mutual fund, for example, is down 6.1% year to date, according to Morningstar Inc.
What happened to the merits of diversification? With U.S. stocks far outperforming their foreign peers over the last five years, investment pros can only continue to counsel patience. "While diversification works over time, it takes time to work," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
The dollar almighty, again: The next time you hear someone complain that the dollar "isn't worth anything anymore," suggest that they give their "worthless" greenbacks to you. The dollar reasserted itself as the world's preferred currency in 2014, underpinned by the domestic economy's strength. The so-called DXY index of the dollar's value against other major currencies is ending the year at its highest level since 2006. Currencies usually reflect where global money wants to go, and that's typically to the strongest economies — in part because of the expectation that economic strength will eventually translate into earning higher interest rates on cash.
In practical terms, the robust dollar is a boon for American tourists abroad. Ten U.S. dollars now buys 8.2 euros or 1,200 yen, up from 7.2 euros or 1,020 yen seven months ago. The dollar's strength also should translate into lower prices on foreign goods. But that means U.S. companies' products are more expensive abroad, a potential head wind for corporate earnings in 2015.
Gold and bitcoin, uncomfortable bedfellows: With the dollar ascending, investors and speculators had much less use in 2014 for the ancient alternative of gold and the newer alternative of bitcoin. Gold, at $1,195 an ounce now, has tumbled 14% from its 2014 high of $1,389. Bitcoin's value has slumped from a 2014 peak of $951 to just $322.
Apple, the once and future king? In early 2013 many investors were sure Apple Inc. had peaked, and vowed not to be sucked in to yet another tech-stock collapse. Back then they could have had the stock for under $60. Now it's around $114, and the company seems to be firing on all cylinders — or all silicon bits. With a stock market capitalization of $657 billion, Apple is America's most valuable corporation by a long shot (Exxon Mobil is No. 2, at $397 billion).
For Apple's true believers, the question isn't whether it can become the first trillion-dollar company — but just how soon it can get there.