2nd Quarter 2014 Market Commentary

Global financial market movement in 2014 could be described in four words: slow and steady rise.  All areas of the market posted healthy, positive returns for the year through June 30, 2014. US Stocks, measured by the S&P 500 Index, were up 7.14%. Both International (4.78%) and Emerging Market stocks (6.14%) are also up year to date. Despite the Federal Reserve’s tapering of bond purchases, known as Quantitative Easing (QE3), interest rates surprisingly declined in the first half of the year. The Barclays US Aggregate Bond Index returned 3.93% through the end of June.  Alternative investments, such as global real estate and commodities, also posted positive returns.

In addition to strong returns, markets experienced near record low levels of volatility during the quarter. The CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility, averaged 13.34 in April and May, well below the historical average of 20, and dropped as low as 11.40 on May 30. As a point of reference, the VIX peaked above 80 in the height of the 2008-2009 financial crisis, 6x the current levels of volatility![1] The VIX index data begins in January 1990, which is nearly 25 years of data, a relatively short time period for investment analysis.  Remember that volatility is both a measure of up movements and down movements. Perhaps investors are neither greedy nor fearful at the moment, but rather, complacent. Read more

4th Quarter 2013 Market Commentary

The US stock market pleasantly surprised everyone in 2013.  The S&P 500 Index experienced a record year. International stocks also had strong year, although emerging market stocks were down and trailed global stock markets significantly. Interest rates rose in 2013, causing negative returns for the bond market. Emerging market bonds, following a strong 2012, fell further than domestic bonds. Alternative investments were a mixed bag.  Global real estate was up slightly, while commodities were down due to weakness in gold, agriculture, and industrial metals. Of course calendar years are arbitrary measures for long-term investors who do not buy in on January 1st and sell on December 31st, but they do serve as convenient time periods for reflection and review of market performance.

Human nature dictates that we gravitate towards that gleaming return of the S&P 500 Index last year. We are tempted to measure our success against this number. How quickly we forget the reason we choose diversification in the first place! Remember the discussion about not “putting all of your eggs in one basket”? Let’s assume you were invested in a portfolio comprised only of the S&P 500 Index, and compare it to two hypothetical portfolios; a properly diversified 60/40 (moderate risk) portfolio and an aggressive portfolio of global stocks. We will compare an investment of $100,000 on January 1, 1995; one portfolio contains only the S&P 500 Index, one is globally diversified portfolio with 60% in global stocks and 40% in bonds, and the third is a globally diversified portfolio with 100% in stocks.[1] Read more