Those who attend the state fair are wise to be skeptical when encouraged to play a game in which “everybody wins a prize.” Nonetheless, that was indeed the investing reality in a quarter in which it was all but impossible to throw a dart and hit a poor‐performing asset class. Stocks and bonds, domestic and foreign, developed and undeveloped, real estate, commodities and even shiny rocks provided attractive rates of return. Only those with substantial cash holdings had reason for regret.
The consistency of positive stock returns was just as remarkable. The S&P 500 rose during each of the three months of the quarter and achieved record high closing prices 16 times. For the entire quarter, this most commonly followed U.S. stock benchmark rose by more than 5%, pushing year‐to‐date gains beyond 7%. This was the sixth consecutive quarter of gains for the market, the longest winning streak recorded since 1998. While this makes it seem as if stocks have been a one‐way bet recently, investors may forget that as recently as January of this year the market fell nearly 4%, leading some to suggest that 2014 would be as bad as 2013 was good.
Within the U.S. stock market, smaller companies provided the lowest returns, rising just 2%. Real estate investment trusts (REITs) provided the best numbers, rising 7%. REITs are now up 17% year to date after being the worst domestic equity asset class last year. In general, a declining interest rate environment is seen as favorable for real estate investments and that has been the case so far this year.
Foreign developed stock markets earned more than 4% in the quarter, with emerging markets providing an even higher 7% return. The investor who magically knew in advance that Argentina would lose a major Supreme Court decision and thus be at risk of default and also that the situation in the Ukraine might lead to an ongoing military confrontation with Russia might have chosen to sell securities in those parts of the world. However, Argentina’s stock market rose 12% in the quarter, Russia’s 10%. This is yet another reminder of the difficulty of predicting stock market returns ‐ even an investor endowed with perfect foresight of these geopolitical events would have struggled to profit from this knowledge.
Following up the first quarter’s strong return of 2%, bond prices rose another 2% in the second quarter, as measured by the most commonly followed bond benchmark, the Barclay’s Aggregate Bond Index. The attractive return in bonds has once again confounded those who have taken higher interest rates as a given.
Finally, gold added almost 4% to first quarter gains and is up 10% for the first half of the year. Silver has enjoyed similar returns. Heavily influenced by the price of oil, a diversified basket of commodities was mostly flat for the quarter, but is still up more than 7% on a year‐to‐date basis.
In a December 2008 visit to the London School of Economics, Britain’s Queen Elizabeth famously asked her hosts, “Why did nobody see the credit crunch coming?” The sad reality regarding the dismal science is that economists as a group have a surprisingly poor record predicting future economic activity. That’s to some extent understandable when one considers that it is difficult even to evaluate the strength of yesterday’s economy or, for that matter, today’s.
For the person who works in San Francisco and lives in Novato, Lafayette or San Mateo, for example, it must seem almost impossible to believe that anyone in California is so discouraged about the economy that even looking for a job seems like a waste of time. Certainly BART trains and freeways are packed. Expensive restaurants often are too, even on Tuesday nights. Employers commonly report that they have difficulty attracting and retaining talented staff. Large parts of the Bay Area have real estate prices that are as high now as they were before the Great Recession. The top end of the market is especially vibrant, with a seemingly endless supply of urgent, price insensitive buyers who offer way above asking price even for houses in unglamorous neighborhoods. Those who live in this world might think fatigue is more of a problem than under‐employment.
But meanwhile, back in reality land, the Bureau of Labor Statistics recently lowered its estimate of U.S. first quarter gross domestic product (GDP) to ‐2.9%, the largest decline in economic activity in five years. The contraction of the economy is thought to have been substantially affected by declining health care expenditures and a brutal winter that kept shoppers indoors. These factors are regarded as one‐offs and most mainstream economists remain generally optimistic about the private sector’s ability to maintain currently enviable profit margins. Be that as it may, on balance the economy is not as strong as many had imagined it would be at this time. This is one of the main reasons interest rates have fallen this year despite the fact that the Federal Reserve, as telegraphed, has persistently tapered the quantity of its Treasury and mortgage‐backed securities purchases.
An 80‐mile drive in almost any direction out of the Bay Area confirms what most of us read about in newspapers. The employment market is improving but at an alarmingly slow pace for those long out of work. Those with jobs but without advanced skills enjoy little opportunity to bargain for enhanced wages. Housing remains vulnerable as well, with prices still far below those seen years ago. Continued foreclosure activity creates pockets of excess inventory, and nervous banks facing ever‐tightening capital requirements are reluctant to lend to anyone whose mortgage application doesn’t check every box. Unfortunately, these sluggish conditions are more representative of the experience of most Americans in most parts of the country. The buoyant activity in San Francisco and other major cities is the exception.
In this complex and muddled environment, it is no surprise that professionals who make their living analyzing and predicting economic activity are struggling to make sense of it all. For the rest of us, the answer to the question, “Is the economy strong?” depends very much on where we live and work.
Written by Jeff Lancaster, CFP®, Principal; [email protected]
|Index||Market||Last 3 Months (4/1/2014 – 6/30/14)||Year-to-Date as of 6/30/14|
|Standard & Poor’s 500||Large Co. U.S. Stocks||5.24%||7.14%|
|Russell 1000 Value||Large Co. Value U.S. Stocks||5.10%||8.28%|
|Russell 2000||Small Co. U.S. Stocks||2.05%||3.19%|
|Russell 2000 Value||Small Co. Value U.S. Stocks||2.38%||4.20%|
|FTSE NAREIT Equity REIT||Real Estate Investment||7.13%||16.25%|
|NASDAQ 100||Technology Stocks||7.06%||7.17%|
|MSCI EAFE1||Foreign Stocks||4.09%||4.78%|
|Barclays Capital Aggregate||U.S. Dollar Bonds||2.04%||3.93%|
|Barclays Capital Municipal||Municipal Bonds||2.59%||6.00%|
|Merrill Global Gov’t Bond||Global Bonds||2.21%||4.56%|
Key economic indicators compiled by Barbara A. Ziontz, CFP®, Portfolio Manager; [email protected] Data Sources: The Wall Street Journal; U.S. Dept. of Commerce ‐ Bureau of Economic Analysis; U.S. Dept. of Labor; Bloomberg.com;
Live.Lehman.com; MSCI.com; REIT.com; NYTimes.com; StandardandPoors.com; Vanguard.com; Dimensional Fund Advisors
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