Disappointing economic data from the first quarter was not enough to stop global equity markets from persistently pushing forward during the second quarter of 2014. Despite geopolitical tensions and continually shifting central bank policies around the world, global markets began to break away from their lackluster early year performances. The global equity and fixed income indexes all posted solid gains for the three months ending June 30, driven by a rebound in investor sentiment, positive earnings reports, and the Fed reiterating its dovish stance on monetary policy.
It has been over a decade since the S&P 500 has been positive for more than five quarters in a row. That streak was broken in the second quarter as the S&P 500 gained 5.2%, which brought its year to date gains through June to 7.1%. An overall positive earnings season and an increase in merger and acquisition activity helped to reinforce Q2 gains. Despite this over 74% of mutual fund managers have trailed this benchmark for the year, which many observers attribute to broad based market swings and lack of performance dispersion between securities. Looking forward, we expect the economy continue to improve at a modest pace driven by positive earnings growth and continued advancement in the labor markets. We see geopolitical risk as the most important risk factor, and potential market detractor, moving forward.
The MSCI World ex-US Index gained 4.6% during Q2, bringing its year to date gains to 5.4% through the end of June. Although the overall performance was positive, results varied widely across different regions. Although Japan’s markets were up over 6%, the economy contracted after implementing a consumption tax rate hike. Economic growth in the Eurozone has remained sluggish and concerns about increasing tensions with Russia have weighed heavily on markets there. Emerging markets have outperformed after Europe announced an additional stimulus package. Chinese equity prices have appeared to stabilize after the government implemented reforms to slow the rate of deleveraging. For the remainder of the year, we expect emerging markets and Japan to continue performing well. We see China as a potential impediment to the global recovery based on the massive amount of deleveraging and audacious reforms that still need to be implemented.
In the second quarter, global bonds built upon the gains made in the first quarter. Yields continued to contract throughout the quarter, contrary to broad based market expectations. The Barclays US Aggregate Bond Index was up during the quarter, posting gains of 2.0%, bringing the year to date gains through June to 3.9%. Global fixed income gained on news that the ECB was expanding its long-term loan program. The Barclays Global Aggregate ex-US Government Bond Index gained 2.7%. Although the Fed has remained accommodative, concerns of a rate hike have increased considerably. We remain hedged to rising interest rates and continue to recommend diversifying fixed income portfolios away from rate sensitive sectors.
Commodities continued their upward trend with the S&P GSCI gaining 2.7% during the quarter. Real estate continued to be the best performing asset class, with the Dow Jones US REIT Index returning 7.1% for the quarter. Private equity had a positive quarter driven by large capital inflows and a boost in M&A activity and growing IPO market. Capital continued to flow into hedge fund strategies and the industry set a quarterly record for capital inflows. The HFRI Fund Weighted Index gained 2.0% during the quarter, led by gains in value arbitrage and event driven strategies. We expect real estate and hedge funds to continue their positive trajectory through the second half of the year, however we expect commodities to struggle as inflation remains low.