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Q1 2014 Capital Markets Update
Last Updated: April 10, 2014
Stock and bond markets got off to a rocky start during the first quarter of 2014 over concerns that the Federal Reserve would tighten its monetary policy as Ben Bernanke finished his tenure and was succeeded by Janet Yellen. Markets pulled back following Yellen’s first public address, which hint that higher interest rates may come as soon as this year or next. Stock markets, with the exception of the Dow Jones Industrial Average, have since recovered most of their lost ground, ending the first quarter of 2014 in positive territory. Bond markets also ended the quarter in positive territory but remain volatile as the risk of higher interest rates is offset by a flight-to-safety, or increased appetite for safer assets, by investors concerned about increased geopolitical tension in Europe and Asia.
For the period ending March 31, 2014: The Dow Jones Industrial Average returned a negative 0.15% for the first quarter but remained a positive 15.66% for the most recent 12-month period. The broader S&P 500 Index posted gains of 1.81% for the quarter and 21.86% for the most recent 12 months. International stock markets gains during the quarter were smaller, reflecting concerns that the Fed’s tightening of monetary policy would hurt growth in international markets. The MSCI EAFE (Europe, Australasia, Far-East) Index posted a positive 0.66% return for the first quarter, and 17.56% for the 12-months ending March 31, 2014.
Fixed income markets remained choppy during the first quarter as concerns about higher interest rates were offset by a shift to less risky assets as investor fears over geopolitical unrest in Europe and Asia increased. The broad-based Barclays U.S. Aggregate Bond Index returned 1.84% for the first quarter but returned a negative 0.10% for the year period ending March 31, 2014. Riskier bonds, as measured by the ML US High Yield Master II Index, had returns of 3.00% for the quarter and 7.57% for the most recent 12-month period. The more conservative US 10-year Treasury Bill index posted a return of 1.45% for the first quarter and negative 4.39% for the year period ending March 31, 2014.
Tighter monetary policy by the Federal Reserve and slowing growth for corporations remain headwinds for the markets. Markets may experience additional volatility as companies report first quarter earnings results in the coming weeks and provide business outlooks for the remainder of the year.
It is critical to have the appropriate mix of stock, bond, and cash investments based on time to retirement, risk tolerance, and return expectations. Investors should conduct regular reviews of portfolios to make sure that allocations haven’t gotten out of balance as a result of recent market movements. For example, the strength in the equity markets through last year may have resulted in portfolios that are overweight in stock-oriented investments and underweight in fixed income investments. As a result, it may be appropriate to sell part of the stock holdings and shift proceeds to fixed income investments to maintain the proper diversification for the client’s retirement. By diversifying across asset classes, investors have exposure to investments that provide growth, income, and preservation of capital (liquidity) through various economic cycles.
Please contact Investment Services for additional information.
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