Quarterly Market Update 3Q 2014 By: Gabriel PotterMBA, AIFA® 2014.10.06

Key news stories

The relatively strong US dollar, given low inflation and weaker peers, was a key theme in the quarter, although this fundamental strength did not translate into equity market out performance.  July and August saw a continued expansion from the 2nd quarter rally, while September demonstrated a reassessment of valuations, given the ongoing risks.

Equities

Compared to other equities, US large cap growth stocks were the winners of the quarter.  Small cap stocks are down around 10% from their peak, while large cap positions maintained their value throughout the quarter.  To a lesser degree, growth stocks moderately outpaced value stocks.  International equities fared worse, with the strong dollar putting pressure on international positions in relative terms.  A feared Eurozone slowdown and potential necessity for quantitative easing from the European Central bank highlights the pressures of international developed markets.

All index performance values are for the 3rd quarter of 2014.

  • US Large Cap Growth - Russell 1000 Growth:   1.49%
  • US Large Cap Value - Russell 1000 Value:   -0.19%
  • US Small Cap Growth - Russell 2000 Growth:   -6.13%
  • US Small Cap Value - Russell 2000 Value:   -8.58%
  • Developed International Markets – MSCI EAFE:    -5.88%
  • Emerging Markets - MSCI EM:   -3.49%

Bonds

The Federal Reserve maintains its schedule to finish tapering bond purchases, the quantitative easing program, but appears in no immediate rush to raise rates.  Conversely, other central banks appear prone towards more accommodative policy, meaning the US dollar becomes stronger relative to other currencies.  As a result, US dollar and interest rate sensitive paper outperform – particularly against non US denominated bonds.  Credit markets and high yields, which tend to correlate with equities, suffer a hit as high yield default rates increase.

Again, all index performance values are for the 3rd quarter of 2014.

  • Barclays US Aggregate Bond:   0.17%
  • Barclays Capital US Intermediate Credit:   0.11%
  • Barclays Capital US Government:   0.32%
  • Barclays Capital US Gov’t/Credit Long Duration:   1.04%
  • Bank of America/Merrill Lynch High Yield Master II:   -1.92%
  • Citi World Government Bond Index (non USD):   -5.38%

Alternatives

 Real estate gives back some gains, but it is still the lead performing asset class, year to date.  Again, a strong dollar equate to weak performance of “real” assets like commodities – the clear bottom performer year to date. 

  • Real Estate - FTSE NAREIT All REITs:   -2.63%
  • Commodities – Morningstar Long Only Commodity TR:   -13.21%
  • Inflation – Barclays US Treasury TIPS:    -2.04%
  • Hedge Funds – Credit Suisse Hedge Fund:  3.42%  (through 8/31/2014)
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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