March 6th 2014 marked the 5-year anniversary of the S&P 500’s intraday nadir of 666.79. Since the depth of the great financial crisis, U.S. equity investors have been treated to a robust recovery driving the S&P 500 index to 1,872 at quarter-end. Developed and emerging foreign equities, as measured by the MSCI EAFE and Emerging Markets indices, have also recovered; yet remain well below the record highs set in 2007.
Quarterly Commentary 2014
The 2nd quarter was punctuated by conflicting readings on GDP growth and job creation. 1Q2014 GDP initially came in at +0.1%, but was subsequently revised downward to -1.0% and later further lowered to -2.9%. This drop was the largest GDP contraction since the Great Recession, the first negative reading since 1Q2011, and the worst contraction in the midst of an economic expansion since World War II. Looking forward, the Fed cut its 2014 GDP estimate by nearly one percent, while the IMF also lowered expectations for U.S. economic growth to 2% for the year. Conversely, jobs data releases were consistently positive through the quarter and have recorded expansionary readings of over 200,000 new jobs each month for the past five months.
Global investment markets closed the 3rd quarter with substantial volatility, influenced in early September by the ECB’s surprise announcement of a rate cut and “QE”, and punctuated at quarter-end by the unexpected departure of Bill Gross from PIMCO. Gross was PIMCO’s CIO and the lead portfolio manager of the PIMCO Total Return Fund, at one point the world’s largest mutual fund. While Europe just embarked on its own quantitative easing, the U.S. will see the curtain fall on QE by the end of October.
A massive slide in oil prices and a coincident rally in the U.S. dollar were the hallmark economic trends in the latter half of 2014. Much of the world is suffering from very slow economic growth; the UK and U.S. are showing the strongest growth in the developed world (+2.6% and +5.0% annualized rate, respectively) while the Eurozone is teetering on the edge of recession. Austria, Italy and Japan posted fractional GDP contractions in the latter half of 2014. Global inflation rates also show significant decoupling; however, the impact of falling energy prices has pushed headline inflation rates lower in most countries. The Eurozone is experiencing deflation; December’s data showed a 0.2% drop in prices over the previous 12 months. Japan is currently reading the highest inflation rate in the developed world at 2.4%; however, much of that positive number appears to be due to the spring consumption tax hike and will likely retrace to a fractionally negative number in the spring of 2015.