The S&P 500 posted a positive return for the third quarter of 2014, its seventh consecutive quarterly gain. However, the 1.1% return was modest compared to returns of recent quarters. Globally, equities struggled as geopolitical tensions rose in the Middle East and Ukraine, increasing the overall level of risk aversion and delivering negative returns.
What can we expect in the coming year? We’ve been talking a lot about the Fed’s quantitative easing (QE) program over the last few years, and it is now finally coming to an end. US economic data continues to outperform the rest of the globe, so much so that the Federal Reserve remains on a path to raise its federal interest rate target sometime next year, for the first time since before the financial crisis began. Regardless, economists remain divided as to when the US interest rates will begin to rise and many anticipate that despite the end of its asset purchase program, rates should remain low, especially if projected inflation continues to run below their goal of 2% over the longer-term. While market performance results may have disappointed this quarter, we should keep in mind that US equities have shown strong longer-term, multi-year returns across all markets.
As the US winds down its stimulus, the European Central Bank is contemplating its own QE program to tackle the weakest inflation rate in five years. European equities were negatively affected by weaker economic data; with worries over the impact of sanctions in Russia. Monetary stimulus from the European Central Bank and the Bank of Japan may support stronger economic growth this year and into 2015, however, both currencies, along with that of other emerging markets, were particularly weak versus the US dollar in the latter part of the third quarter.
Why have we seen a rise in bond prices and a fall in yields this year? The significant rise in yields last year reflected the expectations for the US QE withdrawal and the assumed interest rate rises to follow. Meanwhile, the disinflationary trend seen globally has supported the bond rally and has increased the attraction of fixed coupon returns. Inflation has historically been the main focus for setting interest rate policy and it is still difficult to believe that there will be much of a rush to raise interest rates while growth is only moderate and inflation remains low.
Despite geopolitical tensions and global turmoil, the markets did not directly respond as strongly as some may have predicted. However, as we make our way through the last quarter of 2014, we’ve been starting to see what some are calling a technical correction in the markets. This has been long-awaited by analysts, concerned that valuations for the S&P 500 and S&P/TSX composite indices were running above their historical averages. While we cannot predict market performance with precision, we believe that focusing on the fundamentals and having a disciplined plan in place is the safest way to come out ahead.
All the best,
Anthony Ciccone, B.Comm, CHFC
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