CAPTRUST Chief Investment Officer
2014 continues with major asset classes registering gains in the second quarter, continuing the first quarter’s momentum.
Both stocks and bonds did well in the year’s second quarter, leaving most major indices firmly higher for the full year. For stocks, the U.S.-focused S&P 500 closed up 5.2 percent, while international developed stocks (as measured by the MSCI EAFE Index) gained 4.3 percent. The MSCI Emerging Markets Index, which did not participate in the strong 2013 rally in global equities and started 2014 with a small loss, gained 6.7 percent, thanks to steady exchange rates, relatively tame inflation data, and business-friendly election results in India. Anticipation that the first quarter’s economic slowdown was temporary, coupled with improving economic readings in Europe and China, helped propel stocks higher.
Investors also sought yield and income, benefiting bonds. The broad bond market benchmark Barclays U.S. Aggregate Index posted a 2 percent gain, bringing its year-to-date return to just under 4 percent; note that bonds fell 2 percent in 2013, registering their first calendar-year loss since 1999. Bond strength was broad-based and included gains in mortgage bonds, corporate bonds, and Treasurys; it is worth highlighting that bond strength was a global phenomenon in the second quarter, which also helped “bond-like” assets such as real estate and equity sectors like utilities.
As the rest of the year unfolds, global central banks remain under investors’ watchful eyes, with many wondering if pro-growth policies will continue, or if economic strength leads to inflation, forcing a reversal of recent policies. Major economies like the U.S. and United Kingdom are toning down accommodative policies, while Japan and Europe head in the opposite direction; these differences across geographies lead to a less clear global investment landscape. Corporations are enjoying very low borrowing costs and healthy balance sheets, and consumers appear to be reemerging from weak first quarter spending, seemingly due to poor weather. Earlier this summer, Eastern European and Middle Eastern tensions pushed gas prices to their highest levels since 2008, a trend that could thwart consumer spending.
We continue to see the glass as half-full with respect to the global economy’s forward prospects and the potential for asset prices to continue to head higher, but note that economic growth and asset-class performance do not always move in tandem. Valuation across global equities is mixed, with historically higher valued sectors requiring ongoing revenue and earnings growth to justify current levels. Should the U.S. Federal Reserve decide to reverse its low-interest-rate policy more quickly than markets anticipate, bonds could face a challenging second half of the year. The first quarter’s U.S. economic contraction (the sharpest since 2008) followed by an apparent second quarter recovery, suggests that we could be in a “goldilocks” environment with growth neither too fast nor too slow, leaving investors with a seemingly positive albeit unclear investment backdrop.