Current Thinking

3rd Quarter 2014 Economic & Market Review

Economy
Hiring rose among U.S. employers in September as the jobless rate fell to a six-year low (5.9%) at the end of the third quarter – increasing the odds that the Federal Reserve will hike interest rates in mid-2015. Economists estimate the U.S. economy grew roughly 3.0% in the third quarter compared to 4.6% in the second quarter, yet above its two-year average of 2.2%. U.S. housing affordability may have peaked as higher insurance premiums, increased home values and expected rising interest rates will likely off-set modest wage growth. Globally, sanctions against Russia have hurt Eurozone trade, especially in Germany. Despite global unrest in many oil-producing countries, a supply/demand imbalance and the aforementioned European slow-down curtailed oil prices in the third quarter.

Equity Markets
While the S&P 500 Index has risen for seven consecutive quarters, U.S. small-cap stocks are in a correction. Lower energy prices, an end to quantitative easing and fears of rising interest rates had a negative impact on U.S small-cap value stocks relative to the rest of the market. Large-cap Technology and Healthcare stocks trended upward in the third quarter. U.S. large-cap stocks appreciated in the third quarter (+1.1%; S&P 500 Index) and thus increased their year-to-date (“YTD”) return (+8.3%; S&P 500 Index). However, small-caps fell hard in the third quarter (-7.4%; Russell 2000 Index) and entered negative territory for the YTD (-4.4%). From a style perspective growth outperformed value across the capitalization spectrum in the third quarter. International developed (-5.9%; MSCI EAFE Index) and emerging markets (-3.5%; MSCI EM Index) lagged for the quarter.

Fixed-Income Markets
In the third quarter, long-term bonds (+1.0%; Barclays U.S. Long Gov’t/Credit Index) outpaced intermediate-term bonds (+0.2%: Barclays U.S. Aggregate Bond Index). For the YTD, long-term bonds are up 13.0% compared to intermediate-term bonds which are up 4.1%. Money market returns continued to hover around zero.