U.S. equities dominated the global equity markets in 2014 as investors across the globe sought liquidity and quality. As evidence, the S&P 500 ended the year at 13.69% while the Russell 2000 returned just 4.89% and the MSCI EAFE was down 4.90%. The desire for liquidity and quality was more evident in the fixed income markets as the long end of the U.S. Treasury market had double digit returns to the surprise of almost all analysts.
The flight to liquidity and quality in the global markets that focused on large caps and long-term Treasuries might leave diversified investors wondering what happened in 2014. Although the headlines spoke of new market highs, a diversified portfolio almost certainly underperformed the S&P 500. While diversification benefits were hard to discern in 2014, we believe investors should not abandon this approach. In our opinion, it will be important during 2014 client reviews to address the disparity in performance across the global markets and reiterate the importance of diversification to long-term success.