The global equity markets ended the quarter in mostly positive territory despite continued global economic uncertainty, evolving expectations of the Federal Reserve’s monetary policy, and geopolitical concerns. While the Federal Reserve has suggested that its loose policy and low short-term interest rates will remain in the near-term, it continued to taper its monthly credit asset purchases to $35 billion. Headline risk in the global markets has slightly subsided as policymakers have been proactive in trying to spur economic growth. Social unrest, particularly in Ukraine and Thailand, has diminished.
The U.S. equity markets ended the quarter with solid gains as nonexistent wage inflation pressure helped corporations continue to post strong profits. Large- and mid-cap stocks outperformed small-cap stocks, and value strategies outperformed their respective growth strategies. Performance of the S&P 500 sectors was rather uniform, with the exception of Energy which benefited from rising oil prices.
The non-U.S. equity markets also experienced a rebound, particularly in the hard-hit regions such as emerging markets and Japan. While sales tax increases in Japan hurt the markets earlier in the year, the plan to implement corporate tax cuts and ease regulations contributed to the region’s rebound during the quarter. In April, China implemented a stimulus campaign and banking reform after the region reported slowing economic data in the first quarter. As a result, overall risk aversion in Asia and the emerging markets decreased. At its June policy meeting, the European Central Bank announced further stimulus measures to spur economic growth and inflation, which helped returns for the quarter. However, investor uncertainty regarding the stability of the European nations, both developed and peripheral, still remains.
In the fixed income markets, the riskier sectors experienced a rebound for the quarter as investors sought higher yielding investments due to the sharp decline in 10-year Treasury yields. Emerging Market Debt (“EMD”) was the strongest performing sector for the quarter, despite geopolitical overhang from Russia and Ukraine, the military coup on Thailand’s government, violence in Iraq, and a potential default on Argentina’s sovereign debt. The conservative sectors, namely Treasuries and Mortgage-Backed Securities, underperformed their more aggressive counterparts for the quarter.
The final estimate for first quarter GDP was negative. Special factors including the effect of weather, declines in business inventory and healthcare spending were blamed for the lack of economic growth. While the unemployment rate continues to decrease and jobs have been added consistently, the labor force participation decreased to multi-decade lows at 62.8%. Inflation has steadily increased, helped by a rise in energy prices resulting from Middle East uncertainty. Continued tightening of labor markets may support an upward trend in inflation rates. In spite of rising inflation, the yield on 10-year Treasuries decreased in the first half of the year largely due to weak domestic growth, a decline in supply of Treasuries and increased foreign demand for U.S. dollar denominated assets.