While the second quarter featured an extension of higher U.S. stock prices, up 2.9% in three months and 13.8% for the year, the attention of investors was drawn to quarterly losses in bonds as well as a correction in overseas equity and fixed income markets. Although investors have grown accustomed to annual pullbacks in the stock market, the 3.3% plunge in bond prices during the second quarter startled fixed income investors, particularly those positioned in longer-dated maturity bonds. We are likely witnessing the end of the 30 year bull market in bonds, which featured bond rates as high as 15% in the mid 1980’s. However, we are mindful that interest rates have tried to move higher several times since 2008, only to be held down by sluggish economic growth, Federal Reserve bond buying programs, and other external factors.
Divergence in stock returns around the world has been an additional market theme in the second quarter. U.S. stocks continued to lead the way, as investors were most comfortable buying high-quality U.S. companies. Conversely, emerging market equities, a high risk, high return segment of the market, underperformed in the quarter, down 8%. International developed markets also were down in price, with strength in Japanese equities not able to offset losses in recession laden European markets.
Looking to the second half of the year, we maintain our constructive stance on both the global equity markets and economic recovery. It is widely accepted that the U.S. economy is on stronger footing today, four years removed from the “great recession.” Corporations continue to report strong earnings results and act with increasing confidence, while the U.S. consumer is benefiting from the rebounding housing and job markets. With a strong first half of the year behind us, we will be keeping close tabs on levels of risk in the markets, as investors turn their attention to the unpredictable realm of fiscal and monetary policy.