Main BOS Logo

Quarterly Summaries

2014 Quarterly Summaries

prev next

Review of Securities Markets, Second Quarter, 2014

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.

Is the Economy Strong?

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]

Quarterly Review of Securities Markets: Total Return

IndexMarketLast 3 Months (4/1/2014 – 6/30/14)Year-to-Date as of 6/30/14
Standard & Poor’s 500Large Co. U.S. Stocks5.24%7.14%
Russell 1000 ValueLarge Co. Value U.S. Stocks5.10%8.28%
Russell 2000Small Co. U.S. Stocks2.05%3.19%
Russell 2000 ValueSmall Co. Value U.S. Stocks2.38%4.20%
FTSE NAREIT Equity REITReal Estate Investment7.13%16.25%
NASDAQ 100Technology Stocks7.06%7.17%
MSCI EAFE1Foreign Stocks4.09%4.78%
Barclays Capital AggregateU.S. Dollar Bonds2.04%3.93%
Barclays Capital MunicipalMunicipal Bonds2.59%6.00%
Merrill Global Gov’t BondGlobal Bonds2.21%4.56%

Key Economic Indicators


  • Real Gross Domestic Product (real GDP) in the U.S. decreased at an annual rate of 2.9% in the first quarter of 2014. This was down from an increase of 2.6% in the fourth quarter of 2013. The deceleration in growth reflected a downturn in exports as well as a large decrease in private inventory investment and state and local government spending.
  • In its meeting in June, the Federal Reserve Open Market Committee agreed to continue holding the target range for the federal funds rate at 0% to 0.25%, stating that it would likely be appropriate to maintain this range for a considerable time after the asset purchase program ends. The Committee has agreed to reduce the pace of its purchase of Treasury and mortgage‐backed securities by a total of $10B per month. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer‐run goals of maximum employment and inflation of 2%.
  • The U.S. unemployment rate was 6.1% in June, down from 6.7% at the end of March. Job gains were widespread, led by continued employment growth in professional and business services and in health care. The number of long‐term unemployed has decreased by 1.2 million over the past 12 months and accounts for 32.8% of the total unemployed.
  • Inflation (CPI‐U) increased 0.4% in May. Over the past 12 months, the all‐items index increased 2.1%. The increase was broad‐based, including increases in medical care and apparel. The food index has advanced 2.5% over the past 12 months, its largest 12‐month increase since June 2012.
  • Standard & Poor’s 500 Index first quarter 2014 operating earnings per share decreased 3.3% from the fourth quarter 2013 earnings. Earnings increased 6.0% from the same quarter last year. Analysts are expecting an increase in growth of approximately 7% for the second quarter 2014.


  • U.S. non‐farm worker productivity decreased at an annual rate of 3.2% during the first quarter of 2014. Hours worked increased by 2.2% while output decreased by 1.1%. This decrease in productivity was the largest since a decrease of 3.9% in the first quarter of 2008.
  • The Comex spot rate for gold increased by 2.4% in the second quarter of 2014, closing at $1,314.93 an ounce. Geopolitical tensions in Iraq and the Ukraine have boosted the metal’s safe haven appeal. Gold has increased 9.4% since the beginning of the year.
  • U.S. crude oil prices were up 3.7% in the second quarter of 2014, closing at $105.37. Global events, including the reopening of a port in Libya, are pointing to a steady supply of oil. Recent comments from a Saudi oil official indicate that they would increase supplies if there were a disruption due to crises in Iraq or Syria. U.S. crude oil prices have increased by 6.8% year to date.

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;;;;;;;; Dimensional Fund Advisors

Disclosures and Footnotes:

This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without Bingham, Osborn & Scarborough, LLC’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

(1) Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties or originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

©2014 Bingham, Osborn & Scarborough, LLC


Get B|O|S Perspectives
in Your Inbox