2014 mid-year market review

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As June marks the mid-point of the year, we thought that it would be the perfect time to take a look back at market movements since January, and review where we expect equities and other asset classes to head in the coming months.

While we are optimistic for the second half of 2014 and beginning of 2015, we are cautious about exposure in the market. Currently (June 20th), the stock market is fully valued as the Dow Jones Industrial Average (+3% YTD) and the S&P 500 (+7% YTD) are at record levels. The NASDAQ (+5% YTD) is at levels not seen in 13 years. Investors should not expect too much more in regard to price appreciation, as we think significant, additional returns may be a stretch.

Equities

Earlier in the year, high-flying internet and biotech stocks that led the market to strong gains in 2013 and the first few months of 2014 began to sell off. The selloff started toward the end of the first quarter and into the second quarter, mainly affecting valuation-rich growth companies.

Growth indexes started to substantially lag behind value indexes, especially for the small-cap companies, however, large- and mid-cap stocks are significantly outperforming these small companies year to date. Even as high growth companies sold off, the stock market continued to move higher.

International markets are slightly higher for the year, but were volatile at the start of 2014 as the crisis in Ukraine made headlines. Stocks have continued higher in spite of that (MSCI EAFE +5%).

Emerging markets have also seen volatility as concerns about the spillover effects of the Fed tapering and the slowing economy in China continues. Emerging market stocks have largely shrugged that off and are higher year to date (MSCI EM +5%).

Going into the second half of the year, it would be wise for investors to make sure they are properly diversified across the appropriate sectors, industries and asset classes.

Fixed Income

Bonds are up significantly from the start of the year, but investors shouldn’t expect much more price appreciation throughout the second half of 2014. After double digit losses in 2013, longer dated maturity bonds have surged up double digits this year. High yield bonds have also done well and tend to be more correlated to the equity market.

Additionally, while investors were concerned last year about Puerto Rico and Detroit, municipals have rallied this year, adding mid single digit gains as money flows back in.

Investors expect the Federal Reserve to end their bond purchase program by the end of the year and raise interest in mid 2015. A wildcard for the fixed income market in the second half could be any deviation from the Fed guidance.

The next six months…

While investors may not experience dramatic returns from equities or fixed income, it’s important to stay the course and work with an advisor to determine risk-tolerance levels and to ensure that your portfolio is meeting objectives. Remain long-term oriented, and continue to stay diversified across appropriate asset classes.

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