During the third quarter, both equity and fixed income markets were subdued as investor sentiment turned more cautious over signs of slower growth, continued geopolitical unrest and the Fed raising interest rates. Investor sentiment switched from risk-taking during the second quarter to risk-avoidance during the third quarter.
For the third quarter ending September 30, 2014: The Dow Jones Industrial Average returned 1.87% and is up 15.29% compared to a year ago. The broader S&P 500 Index posted a gain of 1.13% for the quarter and is up 19.73% compared to a year ago. International stock markets were weaker as investors were less willing to take on risk. The MSCI EAFE (Europe, Australasia, Far-East) Index declined 5.88% for the third quarter, but is positive 4.25% compared to a year ago. Riskier emerging market equities as measured by the MSCI EM (emerging markets) Index declined 4.33% during the third quarter but are positive 1.81% compared to a year ago.
Fixed income markets were mostly positive for the third quarter driven by a flight to safety as investor fears of continued geopolitical unrest and slower growth outweighed the threat of higher interest rates. The broad-based Barclays U.S. Aggregate Bond Index returned 0.17% for the third quarter and 3.96% for the year. Riskier bonds, as measured by the ML US High Yield Master II Index returned -1.92% for the third quarter reflecting increased investor caution. The more conservative US 10-year Treasury Bill index posted a positive return of 1.77% for the quarter and 6.54% for the year.
Investor sentiment for both equities and fixed income turned more cautious during the third quarter compared to the second quarter. We expect the markets to remain vulnerable to near-term pullbacks as investors gain insight into business conditions as companies report their third quarter earnings results and 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 allocations have not gotten out of balance as a result of recent market movements. By diversifying across asset classes, investors have exposure to investments that provide growth, income, and preservation of capital (liquidity) through various economic cycles.
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