CAPTRUST Chief Investment Officer
2014 begins with a modest start following 2013’s banner year for many riskier asset classes.
While many investors anticipated, or perhaps hoped, 2014 would see a continuation of the prior year’s momentum in historically risky asset classes, the first quarter delivered a muted but still positive capital market backdrop. Global developed stocks finished higher with the U.S.-focused S&P 500 up 1.8 percent and international developed stocks (as measured by the MSCI EAFE Index) up a modest 0.8 percent. The MSCI Emerging Markets Index, which did not participate in 2013’s global equity rally, lost 0.4 percent as areas such as China and Russia struggled.
Bonds registered their first negative calendar year in 14 years in 2013, as measured by the Barclays U.S. Aggregate Bond Index. Their 1.8 percent first quarter return matched the S&P 500’s. Many market prognosticators anticipated higher interest rates (and by implication lower bond prices) due to an improving global economy; however, concerns about several factors drove bond yields lower after the benchmark 10-year U.S. Treasury yield ended 2013 at its highest level since July 2011. Those factors included fears about worsening Russian-Ukrainian tensions, emerging market currency weakness in January, growth concerns in China, and persistent bad weather across the United States, especially on the east coast, causing economically sensitive companies to share bleak outlooks. These conflating variables drove a bid in bonds and a more tepid tone in stocks through the end of March.
As the rest of the year unfolds, global central banks remain under investors’ watchful eyes, with central bank monetary policies following distinct paths across economies. Newly installed U.S. Federal Reserve Chair Janet Yellen opened her tenure with an eventful first press conference while markets parsed her every comment about the Fed’s attempts to tone down its accommodative policies. While still encouraging low interest rates and higher asset prices, Japan must digest a sales tax increase effective April 1 which could impact economic growth currently being challenged by higher consumer inflation. European central bank policy hinges more on words than action with central bank president Mario Draghi indicating a commitment to pro-growth policies but not yet acting despite mounting deflationary concerns. China may be forced to return to stimulus mode as its growth rate slows amid imbalances in the property and banking markets.
While the “little” increases across asset classes were inconsistent with recent investor experience, they may presage a return to more normal returns in the longer term. As evidenced above, the global economy remains in an uneven place and asset prices will continue to wrestle valuation alongside forward growth prospects. Springtime means better weather and hopefully better readings about the global economy’s continued repair from the 2008-2009 financial crisis; investors may have been patient with winter’s last remnants, but they are unlikely to be patient should economic data and company earnings reports carry a subdued tone as we head into the year’s second quarter.