Third Quarter Market Review – 2014
The third quarter was not as productive for investors as the year’s first two quarters. Hope for an improving global economic outlook has stalled for now, weighed down by economic troubles in Europe and uncertainty in many developing markets. And low levels of market volatility have given way to some daily price fluctuations that have not been experienced in a while.
Global equities fell 2.3% during the quarter, but remained up 3.7% for the year-to-date. In the U.S. there was a large disparity between the returns on large company stocks versus small company stocks, with the former showing considerably stronger relative performance. The S&P 500 Index rose 1.1% while the Russell 2000 Index fell 7.4% during the quarter. Outside the U.S. the returns were more uniformly negative. International developed markets lost 5.9% and international developing markets gave up 3.5% during the quarter. Commodity prices fell almost 12% during the quarter, reflecting over-production and weaker global economic expectations. In Hong Kong stocks retreated amid pro-democracy demonstrations. Russian stocks slid 15%, hurt by escalating tensions with Ukraine, increased sanctions from the West, a declining ruble and falling commodity prices. Two bright spots were stocks in Mexico and India, both gaining 2% on the strength of reform-minded governments.
During the third quarter, global bond markets generally continued to build upon gains made in the first half of the year. The 10-year U.S. Treasury yield finished the quarter at about 2.52%, about the same level it began the quarter. In Europe, bond yields moved lower and reflecting support from the European Central Bank, Spanish and Italian 10-year bond yields, which had soared during the European debt crisis, are now lower than that of U.S. Treasuries! With U.S. bonds yielding more than other developed-market debt, the dollar rose sharply against the euro, the yen and most other currencies.
“I can calculate the movement of stars, but not the madness of men.” Sir Isaac Newton