Market Commentary During the second quarter, 10-year US Treasury bond yields bottomed at 1.6% before ballooning to 2.6% once the Fed suggested it might taper its proactive bond purchasing program. The rapid interest rate rise has focused attention on "low risk" bond portfolios and reminded investors that it is possible to lose money in high grade fixed income. Meanwhile, US equity markets continued to reward investors as the S&P 500 Index ended the quarter with a +2.91% return and the Russell 1000 Value Index rose +3.20%. While an extended rise in equity prices would normally portend a cautious outlook, corporate earnings have improved such that valuation multiples remain below historical averages—particularly considering widespread balance sheet deleveraging and improved capital allocation policies. In addition to reasonable valuations, the US economy appears to be on the mend. A recovery in the US housing sector has improved consumer balance sheets as well as confidence, which should further stimulate economic activity. Moreover, employment and manufacturing have continued to exhibit signs of progress. Unfortunately, the outlook for equities is not entirely upbeat—Europe has struggled, emerging markets (China) have slowed, and the US political landscape remains divided.
Taking a closer look at the US equity market during the quarter, performance dispersion by sector was rather significant as the financials, consumer discretionary, and healthcare sectors posted returns in the mid-to-high single digits. Commodity-tied sectors lagged as prices for Brent crude oil (-6%), industrial metals (-10%), and natural gas (-11%) declined. Consequently, energy, materials, and utilities had negative returns during the quarter. Continue Reading »