October 17, 2014

As markets headed into the third quarter of 2014, initially strong economic data gradually began to weaken. Furthermore, headline risks contributed to overall risk levels, and technical indicators also indicated overextended markets. These volatile conditions corresponded to a volatile market, as the S&P 500 reached record levels but ultimately ended the quarter largely flat and in decline.

Several geopolitical risks carried over into Q3 from Q2; namely, ISIS’ rampage through the Middle East, the crisis in Ukraine and sanctions against Russia, and the conflict between Israel and Hamas in Gaza. In the third quarter, Argentina’s “selective default” and the spread of Ebola had added to the smorgasbord of headline risks. Heading into Q4, pro-democracy protests in Hong Kong sparked concerns of a negative impact on Asia’s economies.

Of note, the sanctions against Russia continued to have a negative impact on European economies; Germany in particular suffered, as the Eurozone country with the largest share of its economy tied to Russia. As Germany is the engine that drives the Eurozone, German weakness rippled through the Eurozone throughout Q3, particularly in Italy and France.

It is important to note that although foreign economic conditions weakened throughout the quarter, in addition to geopolitical risks and indications of a technically overextended market, domestic economic data stayed strong. The US economy remained robust throughout the quarter, providing an important stabilizing note to markets. Nonetheless, by quarter-end, the S&P 500 index had declined once and was in the midst of a second decline, and was headed into Q4 mostly unchanged on the quarter.

The following indicators are representative of the overall economic climate in the first quarter of 2014.