Stock markets began to heat up in February even as winter storms continued to cause problems throughout the US. The S&P 500 followed its largest monthly drop in January in nearly two years of 3.46% with an even larger 4.57% gain in February to reach fresh all-time highs. Volatility was bound to increase at some point following a relatively steady 2013 but such resiliency is good to see.
Attached is the updated table ranking asset class returns over the last 15 years which shows last year’s returns led by small cap stocks with commodities posting the largest loss. Often, instead of spreading risk and investing for the long term, investors look at last year’s big performers and want to move significant portions of their portfolio to those asset classes. This chart, however, is not a road map of where to invest for 2014 but an illustration on the importance of allocating risk across asset classes.
September and October were active in terms of headlines but very little in terms of change. The Federal Reserve surprised many analysts when they decided not to begin tapering QE at the September meeting. At the time, the decision garnered many critics considering the persistent signs of economic improvement in our country but looks appropriate now that we are on the other side of the 17-day government shutdown.
A lot has been written about the bond markets recently and much of it has unfortunately been misguided. Bond prices did move lower in May and June as interest rates rose on talk of tapering by the Federal Reserve but what the media has missed is that the bond market is fundamentally different from the stock market and a pullback in one can’t be compared to a pullback in the other.