The S&P 500 advanced 5.2% in the second quarter, posting its sixth quarterly gain in a row after closing at record highs on 16 separate occasions during the quarter. While a revised first quarter GDP report showed a 2.9% contraction (the largest since the Great Recession), there was consistent job creation in the quarter, and unemployment in the U.S. fell to 6.1%.
Volatility also fell during the quarter, and the CBOE Volatility Index hit its lowest level since 2007. With the easing of tensions in Ukraine and stimulus from the European Central Bank, markets around the world followed the U.S.’s lead. Emerging markets stocks and bonds were some of the biggest winners, after trailing over the recent past, as riskier assets outperformed.
In the U.S., larger companies (+5.2%) continued their recent trend of outperforming smaller companies, which experienced an almost 10% decline before closing out the quarter with a 2.0% gain. Only micro cap stocks logged a negative result for the quarter, falling 1.4%. All sectors produced positive returns, ranging from Energy at the top with a 12.1% advance, down to Financials, with the smallest gain at 2.3%.
Overseas stocks also produced strong results for the second quarter after lagging their U.S. counterparts considerably for some time. Developed country stocks posted a 4.1% return and saw underperformance in the small cap arena (2.1%) similar to what was seen in the U.S. Canada and Norway benefitted from rising oil prices and had the best results, +9.9% (US$). At the opposite end was Ireland, which lost 9.0% (US$). Emerging markets stocks climbed 6.7% in a reversal of their bottom-of-the-pack first quarter results. Turkey led the way (+15.4%), while Greece was the worst performer, falling 10.7%.
Despite many expectations for higher interest rates (and lower bond prices) following unprecedented stimulus efforts since the Crash, bonds turned in another good quarter. The Barclay’s Aggregate index (representing domestic investment grade bonds) rose 2.0% as the yield on the 10-Year Treasury note fell to 2.53% on June 30 from 2.72% on March 31, after starting the year at 3.03%. Longer dated bonds did even better—the Barclay’s Long Government/Credit index notched a 4.9% return. The spread between the treasury yield and investment grade corporate bond yields fell below 1% for the first time since 2007. Another reflection of investor appetite for yield in this low rate environment–below investment-grade bonds, so-called “junk bonds,” rose 2.5% for the quarter, after their average yields were bid to an all-time low in June. Local emerging markets bonds returned 4.0%.
While some global tensions abated during the quarter, concerns remain about the strength of the recovery, employment and wage growth, interest rates and stock market valuations. The second quarter was another example of the market’s ability to confound expectations along those lines. Portfolios with a broadly diversified mix of stocks and bonds rewarded investors who look beyond the current environment and have a solid long-term plan in place to achieve their financial objectives.