During the second quarter, equity markets regained their footing to finish in positive territory as investors were reassured by Fed Chairman Janet Yellen’s press conference that interest rates would remain low in order to stimulate growth. 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 due to increased geopolitical tension in Europe, Asia and the Middle East.
For the period ending June 30, 2014: The Dow Jones Industrial Average returned 2.83% for the second quarter and is up 15.56% compared to a year ago. The broader S&P 500 Index posted gains of 5.23% for the quarter and is up 24.61% compared to a year ago. International stock markets also increased with the MSCI EAFE (Europe, Australasia, Far-East) Index increasing 4.09% for the second quarter, and up 23.57% compared to a year ago. Even the riskier emerging markets posted gains with the MSCI EM (emerging markets) Index increasing 5.64% during the second quarter compared to a decline of -0.80% during the first quarter of 2014 over fears of higher interest rates.
Fixed income markets posted gains during the second quarter driven by a flight to safety as investors feared that geopolitical unrest in Europe, Asia, and the Middle East could intensify. The broad-based Barclays U.S. Aggregate Bond Index returned 2.04% for the second quarter and 4.37% for the year. Riskier bonds, as measured by the ML US High Yield Master II Index, had returns of 2.57% for the quarter and 11.84% for the year as fixed income investors sought higher yields. The more conservative US 10-year Treasury Bill index posted a return 2.25% for the quarter and negative 0.26% for the year.
While equity and fixed income markets posted gains during the second quarter, we remain cautious at the current levels as signs of slower economic growth, higher inflation (prices paid for energy, raw materials, food), and increased geopolitical risk weigh on investors. As companies begin to report their second quarter results and outlooks for the rest of the year, markets could get choppy as investors digest the results.
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 allocations have not gotten out of balance as a result of recent market movements. By diversifying across asset classes, investors will have exposure to investments that provide growth, income and preservation of capital (liquidity) through various economic cycles.
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