The third quarter of 2014 was full of geopolitical turmoil: Russia’s proxy war with Ukraine, renewed US military involvement in the Middle East, and Scotland’s independence referendum were among the notable events that took place. In the investment world, this mayhem translated into weak stock markets and a rising US dollar relative to most other currencies.
The rising value of the dollar contributed to a terrible performance for commodities, which had their worst quarter since the global financial crisis in 2008, and losses for both stocks and bonds outside the US. The only asset classes that eked out slightly positive returns in the quarter were US investment grade bonds and cash.
The energy sector was the worst-performing stock sector as falling commodity prices hurt energy companies. The sector’s plunge makes energy one of the worst-performing sectors year-to-date; the health care sector, which continued to post solid returns in the most recent quarter, is now the top-performing sector so far this year.
Stocks in every developed country outside of the US took a beating. Some of the smaller European countries such as Austria and Greece fared worst, but Australia, Germany, Italy, and Spain were among the other countries that had worse than -8% returns for the quarter.
Political risk will likely continue to play a key role in financial markets going forward: additional political instability could cause the trends from the third quarter to continue. Much will also depend on the actions of the Federal Reserve in the US and the European Central Bank in Europe, which are moving their policies in opposite directions. The Fed is winding down its “quantitative easing” program that was aimed at boosting the economy and is now talking about raising interest rates next year, while the ECB is desperately trying to foster faster economic growth. If the ECB succeeds, European stocks could reverse the shellacking they experienced this past quarter.