The second quarter of 2014 was positive for U.S. Equities. The S&P 500 index saw a steady increase since early April reflecting gains for the year of 7.14%. The Dow Jones Industrial Average which did not do as well is up 2.68% year to date. International equities as represented by the MSCI World Ex U.S. Index are up 5.40%. Fixed Income as represented by Barclays Aggregate Bond Index did relatively well and returned 3.93% year to date.

The price to earnings ratio (P/E) of the S&P 500 is getting a bit stretched at close to 18, but it is still below the peak of the last two bull markets. We still need to see some good things happen to keep this bull market alive with a re-acceleration of top and bottom line growth for U.S companies. We will get a better sense of things in July as earning reports begin to come in. This information could either continue to fuel further expansion of U.S. Equities toward record high levels or be the catalyst that brings about what some have been expecting for a while now which is a correction to the tune of around 10%.

We remain optimistic that second quarter economic growth is likely to show a nice improvement over the weak, weather hampered results from the first quarter. Actually, given the recent first quarter GDP revision to down 2.9% annually from what had been initially reported at up 0.1% and later revised to down 1%, it is clear that the issues went far beyond the weather. The latest revisions reflect much weaker spending in healthcare than had been assumed. Although we are still in growth mode, the growth continues to be subpar as evidenced by relatively weak wage growth, bank lending, retail sales and housing starts. The confidence booster recently came from a strong improvement in the U.S. industrial production number in May with a higher share of the industrial infrastructure being utilized. Given where we have been so far, the end of year GDP growth number is not likely to be over 3%, but things have been looking up recently.

Despite the higher than expected inflation tick in May, inflation remains low by historical standards and the Fed has made it clear that they have no intention of raising interest rates any time soon. This continued low interest environment has and continues to be a great tail wind for the U.S. equity markets. The environment remains on the balance favorable for the equity markets. We certainly could benefit from policies that are friendlier to the business environment. It seems that much of the drag comes from growth hostile regulations at this juncture in the cycle. The numbers reflect that more businesses in the U.S. have been closing down compared to those starting up for the first time ever. This trend has continued since 2008 despite the economic recovery. The American economy is less entrepreneurial now that any point in the last three decades. If this continues, the implication is that we may be stuck with slower growth for an extended period of time.

At the global level, it appears that we are near an inflection point to a faster rate of growth which would coincide with ours. Europe is facing low inflation and with the European Central Bank prior easing moves, the risk of a confidence crisis is much reduced. This will foster continued but moderate expansion. Geopolitical risk in Eastern Europe and the Middle East will most likely continue to be a factor in the near future.

Thank you for the opportunity to serve you. We hope that you have an enjoyable rest of the summer and a wonderful 4th of July.