Going into this year, there was an expectation that 2014 might not be a very good year for financial markets. At the end of last year interest rates on longer-term bonds were starting to rise, implying that this year would likely not be very good for the bond market. In addition the stock market was coming off a fabulous year in 2013, which left many wondering about the upside for stocks in 2014.
While there have not been any dramatic moves in the market this year, investors are making money. Unless someone has the bulk of their funds in a money market account, people should have achieved returns in the 5 percent range with a well-diversified portfolio, so far this year.
What has been interesting about 2014 is that all the major investment classes are positive. This includes U.S. stocks, international developed markets, emerging markets, bonds, gold, and commodities. This is the first time that all these investment classes are positive in unison for the first half of a year, since 1993. In addition real estate has garnered positive returns.
While I normally do not recommend gold and commodities as part of an investment mix for most people, it is interesting to see how they are performing. Normally gold and commodities perform better when stocks and bonds are not doing as well. That is what has been unusual about this year, is that all these asset classes have been positive.
There is a potential negative with higher commodity prices, and that is inflation. The price of food has been increasing, especially with regards to beef. In addition oil prices have risen in part due to tensions in Iraq, which are being reflected in somewhat higher gasoline prices.
Our economy is increasingly service based, so higher commodity prices are not as significant to the overall price level, as they once were. Measures of overall consumer inflation still remain fairly low. However, if commodity prices do continue to rise, that could start to have a more appreciable impact on consumer prices in general.
Economic growth thus far in 2014 has been below expectations. This was attributable to a weak first quarter, due largely to a severe winter in much of the country. This weaker growth in part contributed to longer term interest rates falling, which has been good for the bond market.
Other measures of the economy, such as employment growth have been more positive. Would expect economic growth to be significantly better for the second quarter of the year versus the first, and this trend should continue into the second half of the year. Better economic growth may result in interest rates starting to rise again.
Last year there was a major divergence in performance between the U.S. stock market versus international ones, with the U.S. performing much better. This year performance has been more uniform. Overall international markets, notably emerging ones appear relatively inexpensive versus the United States.
This period of calm and uniformity among financial markets will not last long term. That is why it is important to have a diversified portfolio.
Some might think that with the first half of this year being quite good, it might be a good time to sell. The problem with that approach is, if you sell, when do you get back in? Market timing may work in the short run, but seldom leads to out performance over time.
The better approach to take would be to review your investments. The end of a quarter is normally a good time to do so. If your investments in stocks have grown to be a larger percentage than your target, this might be an opportune time to reduce your weighting in stocks. You might also want to adjust your mix between domestic and international stocks.
However, I would refrain from making major adjustments. If you are just starting to invest, building up your positions on a gradual basis would be an appropriate course of action.
