Current Thinking

2nd Quarter 2014 Economic & Market Review

Economy
The domestic economy experienced continued modest improvement in unemployment and housing. Through the addition of roughly 600,000 jobs over the quarter, total payrolls are now above the pre-2008 crisis levels. Median existing home sale prices increased by 5% year-over-year, with mortgage activity receiving a boost from lower interest rates in the second quarter. The Federal Open Market Committee (“FOMC”) reduced its monthly asset purchases by an additional $10 billion to $35 billion. Eyes will soon turn to the FOMC’s reinvestment plan once the asset purchases wind down at year end. Geopolitical concerns did little to disrupt the equity investors wed to easy credit; however, a slight decrease in interest rates may have been result of a flight to quality on the part of bond investors, over these same seemingly benign disruptions overseas.

Equity Markets
U.S. equity markets appreciated across the style and market capitalization spectrum – with the exception of microcaps which fell 1.4%. Small-caps (+2.1; Russell 2000 Index) lagged both large-caps (+5.2%; S&P 500 Index) and mid-caps (+5.0%; Russell Midcap Index). The S&P 500 Index has now risen for six consecutive quarters. While there was little distinction between growth and value within large caps, value outpaced growth within the small-cap and mid-cap ranges. International developed (+4.3%; MSCI EAFE Index) and emerging markets (+6.6%; MSCI EM Index), also participated in the equity rally.

Fixed-Income Markets
While the Barclays US Aggregate Index (+2.0%) provided substantial returns for the quarter, it was outpaced by long-term bonds which rose handsomely, measured by the Barclays U.S. Aggregate Long Government Index (+4.7%) and the U.S. Aggregate Long Credit Index (+5.0%). Money Market returns continue to hover around zero.