Second Quarter 2014: The Rally Continues
The story of the second quarter was much the same as we have seen over the past several years: sluggish overall US growth coupled with surprisingly resilient corporate profits. The effect has been new high after new high for the S&P 500 as it has now reached a new peak on 22 days since January 1st. The Crimean crisis was a slight blip in early part of the second quarter, overwhelmed by higher-than-expected US earnings. Analytical firm Factset reported that 74% of companies in the S&P 500 reported earnings that beat analyst expectations during the quarter. These earnings propelled the US stock market 5.2% higher than where it began the quarter. Smaller market capitalization companies, which had rallied almost 40% in 2013, lagged their larger counterparts but still finished up for the quarter, with the Russell 2000 index returning 2.0%.
The stock market was unfazed by several downward revisions for first quarter US GDP, as the final estimate showed an annualized 2.9% contraction due to severe winter weather – the worst quarterly GDP report since 2009. Consumer confidence remained elevated as job openings and housing sales reached pre-recession levels. Corporate bond spreads tightened with the rise in the US stock market as Treasury yields declined, doubly benefiting credit and high-yield fixed income indices for the quarter. Inflation expectations rose during the quarter as commodity and energy stocks posted the largest gains across the major sectors.
Internationally, easing tensions in Crimea helped to boost international indices higher after a mild first quarter increases. European sovereign borrowing rates moved lower while growth remained sluggish. In an effort to boost economic performance and fight disinflation, the European Central Bank became the most important central bank ever to impose negative rates on deposited funds, the latest element of ECB President Mario Draghi’s “whatever it takes” strategy to save the Euro. India was one of several strong emerging market performers in the second quarter as it elected reformist candidate Narendra Modi its new prime minister.