Second Quarter Market Review – 2014
The year’s second quarter was full of surprises for investors, not all of them bad, as nearly all major asset classes gained over the three months ending June 30 and year-to-date. In fact, many equity markets around the world reached new highs, thanks to an improving global economic outlook and continued low interest rates. However, recent low levels of market volatility do have some market observers worried about complacency as investors seem to shrug off geopolitical risks.
Global REITs rose more than 7% during the quarter and are now posting the strongest year-to-date returns among growth oriented benchmarks. Not far behind were Developing Markets stocks, gaining 6.6% during the quarter, as investors began to return to the “unloved” regions of the world. Economic reform packages helped to boost Indian stocks after the election of Narenda Modi, and there is hope that the Chinese economy bottomed during the second quarter. Higher oil prices caused by the instability in Iraq benefited Russia, and Brazil made gains as excitement over the World Cup soccer tournament grew.
In the second quarter of 2014, global bond markets built upon gains made in the first three months of the year. The 10-year U.S. Treasury yield declined from 2.72% to 2.53% during the quarter, boosting bond returns. Economic data broadly improved and central banks reinforced their commitment to accommodative monetary policy. Current inflation readings are below targets in both the U.S. and Europe. This means that the Federal Reserve has plenty of time to think about adjusting short-term interest rates. The promise of low rates for awhile longer in the U.S. has pushed investors into higher yielding sectors of the bond markets. While this has given investors good recent results, it may be that much of these gains have been “borrowed” from the future.