2 Q Investment Overview -- Our Thoughts

The “Goldilocks” environment for the US stock markets continued in the second quarter as gains continued broadly in the major stock indices. The “Goldilocks” environment now seems to mean moderate economic growth and low inflation combined with accommodative monetary policy that is “just right”. During the quarter, both the US Federal Reserve and the World Bank lowered their 2014 estimates for GDP growth to 1.9% and 2.8% respectively. The main culprits cited for the reduction in future growth projections were the bad weather in the US, the crisis in Ukraine, rising energy costs, and the continuing deceleration in China’s economic outlook.

The reduction in world growth expectations has also meant that fears of higher interest rates have been quelled…for now. In the US, the Federal Reserve has continued to taper its bond purchases by the stated $10 billion per month. In addition, Janet Yellen continues to telegraph the message that tapering is not raising interest rates. In Europe, Mario Draghi, the head of the European Central Bank, has adopted a series of accommodative monetary measures including a negative interest rate on bank reserve deposits. Draghi has also stated that he will take additional steps if need be to keep the Eurozone economic recovery moving forward. And finally, the Bank of Japan continues its program of asset purchases. The net result of all this central bank activity was that the US 10-year Treasury bond yield actually declined during the quarter from 3.0% to the current level of 2.5%.

International markets were once again mixed in the second quarter. The MSCI EAFE Index gained 4.3%. Far East markets performed well after a difficult Q1 with the MSCI Japan Index advancing 6.7%. And finally, emerging markets were also strong with the MSCI Emerging Markets Index posting a 6.7% increase for the quarter.

So where do we go from here? We believe that the “Goldilocks” US stock market is indeed for now “just right”. That said, valuations are no longer cheap nor are they excessive. The stage has been set for the Fed to increase rates at some point in 2015 but for now has not telegraphed that message. And finally, while 2.8% world GDP growth is not at a torrid pace, it still is solid growth. However, in a sub 3% world growth economic environment, it would not take much to derail the growth trajectory. As such, we continue to be long biased but short term cautious.

At Shepherd Financial Partners, we firmly adhere to the philosophy of sound asset allocation strategies and we do so by adhering to a rigorous investment discipline. We continuously monitor the risks associated with various asset classes and make tactical adjustments to our clients’ portfolios so that they may realize the potential benefits of a properly constructed diversified portfolio with the lowest risk adjusted profile possible.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not eliminate market risk.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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