Volatility reentered the market in the 3rd quarter of 2014. Geopolitical risks caused fluctuations in global markets, spurred on by the Ebola outbreak in West Africa, continued tensions on the Ukraine/Russia border, and by ISIS in Iraq. Despite this, the US GDP rose at a robust 4.6% annualized pace for the quarter. Currency moves were increasingly notable as the quarter wore on, with the US dollar strengthening steadily. Falling oil prices in September gave markets pause as falling global energy demand presented concern that global growth was slowing.
In the 3rd quarter, U.S. equities were positive on cap-weighted basis. US “blue chip” stocks fared best, with the S&P 500 up 1.1% for the quarter and finishing near a record high. Small cap stocks significantly underperformed large caps, with the Russell 2000 down 7.4% for the quarter. It should be noted that performance has been unusually mixed in 2014. While the large cap indexes have been up 7-8% (Russell 1000 up 8.0% through 9/30/2014), mid-cap indexes are up only about half and small cap indexes are down 4-5% (Russell 2000 down 4.4% through 9/30/2014). The divergence across sectors has also been striking. Health care and utilities are up mid-to high-teens while consumer discretionary is relatively flat for the year.
Global equities delivered negative returns for the quarter in US dollar terms as geopolitical tensions rose around the world. The MSCI All World Ex-US Index was down 5.2% for the quarter. Eurozone equities were negatively affected by weakening economic data. Worries over the effect of Russian sanctions negatively affected consumer sentiment in Euro countries, particularly Germany. Japan recorded positive returns for the quarter, as corporate earnings increased on a weakening Yen. In dollar terms, however, the MSCI Japan index was down 2.5% as the weakening currency nullified market gains. Emerging markets lagged developed markets during the quarter. The MSCI Emerging Market Index was down 3.5% for the quarter, primarily driven by evidence of decelerating growth in China, election-related uncertainty in Brazil, and a weakening currency driven by sanctions in Russia.
Returns in fixed income assets were generally lackluster during the 3rd quarter. The Barclays Aggregate Bond Index was up 0.17% during the quarter. Rising short-term interest rates pressured short-duration indexes, and widening credit spreads led to losses in corporate bonds. The Fed helped to drive yields lower by committing to curtail its monthly assets purchases in the 4th quarter and delay any action on interest rates until later in 2015.
During the quarter, the S&P GSCI was down 12.46% and real assets declined across the board as global growth, inflation, and demand remained sluggish. Additionally, oversupply and an appreciating US dollar put downward pressure on commodity prices. The agriculture market was pulled down by oversupply, resulting in double digit losses for the quarter. Gold and silver both sold off steadily during the quarter. Gold fell roughly 8.5% and silver fell over 20% from its July high. The third-quarter of 2014 will most likely be remembered as the beginning of a precipitous drop in oil prices. Oil prices were seemingly unaffected by geopolitical news and high supply paired with a decreasing demand outlook caused prices to tick downward. Oil prices continued to fall and West Texas Intermediate (WTI) prices were down more than 10% by the end of the quarter. Real Estate lost some ground during the quarter due to disappointing non-residential housing data and the threat of rising interest rates. The Dow Jones US REIT Index lost 3.6% and the FTSE NAREIT Index fell 2.6% for the quarter. Hedge funds were essentially flat during the quarter. The HFRI Fund Weighted Index was down slightly, losing 0.09% through September. Although the index was down, Macro and Systematic/CTA funds were the best performing strategies during the quarter. The losses were led by the Equity Hedge Index which was pulled down by exposure to energy and basic materials.