The Federal Reserve’s decision to increase interest rates further strengthened the dollar, thus applying more pressure to crude oil and emerging markets. Stocks lost their footing during the month, with domestic large caps returning -1.6% and small caps -5.0%. In the S&P 500, defensive sectors generated positive results while cyclical/export sectors (e.g., energy, manufacturing, cyclicals) ended in the red. Bond markets also experienced volatility, as shorter-term interest rates drove Treasury prices lower. Corporate bonds, fueled by liquidity concerns in the high yield bond market, ended the month lower. The lone bright spot were REITs, which continue to benefit from the strength of the domestic housing recovery.
- The Federal Reserve voted to lift interest rates off of 0% for the first time in seven years, emphasizing a plan to gradually increase rates over a three year period; within 24 hours, most major banks increased their prime rate by 1/4 point to 3.5%
- WTI crude oil remained below $40/bbl for most of the month, ending the year at 2009 price levels, as a mild winter and increasing stockpiles exerted further downward pressure on the commodity
- The European Central Bank further reduced its deposit rate, from -0.2% to -0.3%, thus penalizing banks for holding deposits instead of lending; the ECB continues its efforts to stimulate the European economy and spur growth from its sub-1% levels