Global stocks rose dramatically in February as US and non-US developed market benchmarks recouped January’s losses. Equity investors focused on continued accommodation by major central banks, including “dovish” comments by Janet Yellen, the new Fed chair; robust corporate earnings; and (on a weather-adjusted basis) positive economic data. In response, the S&P 500 closed the month at a new high; even recent laggards—emerging markets’ stock, bonds and currencies--recorded strong gains in February. Interest rates on Treasuries saw little change during the month, providing support to corporate bond prices. Commodities advanced for the second straight month, led higher by gold which recovered a portion of its losses from 2013.
As we enter March, we are reminded of the risks that lurk globally, be it the political crisis in Ukraine that could morph into a regional conflict with Russia, or angry protests on the streets of Venezuela which could threaten the stability of a major oil producer. Additional sources of short-term unrest include the potential for slowing growth in China, and fragile balance of payments positions of other major emerging economies such as Brazil and Turkey. The early months of 2014 serve as a reminder of the importance of a risk-balanced approach to asset allocation, even on the heels of 2013, when widespread diversification appeared to dampen returns. We recommend that investors pursue a disciplined approach to investing by trimming asset classes that have appreciated significantly, such as US equities, while rebalancing to more attractively priced investment segments. Stocks and bonds of emerging markets continue to appear appealing on a fundamental basis; however, we acknowledge that they may experience additional volatility in the short term. We recommend deploying actively managed strategies in these markets as there are likely to be pronounced winners and losers across countries and sectors.