U.S. stocks rose in the second quarter, overcoming crises in Ukraine and Iraq, slowing Chinese growth, and a first-quarter U.S. economic contraction. Investors focused instead on signs of renewed U.S. growth, improved merger and acquisition activity, and broadly accommodative monetary policy even as the Fed continued to wind down its asset purchases. Non-U.S. developed markets trailed U.S. stocks by a slim margin, and equities in emerging market outperformed. Domestic bonds recorded modest gains. Long-term Treasuries and corporate debt led performance in the investment-grade universe, but municipal and mortgage-backed debt also did well. Emerging market bonds outpaced developed markets as investors sought higher yields, a pattern that also provided a boost to the high yield market.
The Target Retirement Fund 2045 returned 4.47% in the quarter compared with 4.28% for the S&P Target Date 2045 Index. The Since Inception (08/20/2013) total return was 18.20% as of June 30, 2014. The fund's expense ratio was 0.76% as estimated on the fund's inception date, August 20, 2013.
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We favor stocks versus bonds as the current low-yield environment is less favorable for bonds. However, stocks are broadly priced at levels at or above historical averages across multiple measures, with some segments such as U.S. small-caps appearing expensive, and we reduced the size of our overweight as a result. We also reduced our overweight to U.S. growth stocks. While the current low level of economic growth favors growth stocks, which tend to be less reliant on a strong economy to generate rising corporate earnings, a gradually improving economy has moderated this outlook. We reduced our exposure to high yield and nondollar bonds relative to U.S. investment-grade debt. We initiated an overweight to emerging market bonds as yields have moved to more attractive levels, which helps to compensate for near-term risks of slower economic growth and rising rates.
We expect modest global economic growth over the next few quarters. The U.S. economy is rebounding after a sharp first-quarter contraction and should grow modestly, supported by diminishing fiscal headwinds, improving private sector demand, moderate job growth, and associated expectations for increasing household formation. European economic data stumbled recently, but we expect the shallow recovery to continue despite concerns about elevated unemployment and declining inflation. Japan's stimulative policies have breathed life into the economy, but sustainability will depend on more challenging structural reforms. Emerging markets remain vulnerable to rising U.S. interest rates, with nations highly dependent on external funding most at risk. However, recent currency devaluations may offer opportunities for some export-related emerging market companies as developed market growth picks up.