Resurgent fears about Europe, along with slowing growth in emerging markets and uncertainty over the US presidential election, drove investors to a “risk-off” position in the second quarter. However, while today’s challenges are “real and consequential” they are not insurmountable, Pitcairn said in its economic and market commentary.

June saw the most “draconian” of European forecasts abate as Greece elected politicians willing to work with the European Central Bank, the firm said. Ultimately, global stock markets declined, with nervous investors favoring the US, where the stock market lost just 3.1 per cent for the quarter compared to losses of 8.8 per cent and 7.1 per cent in emerging markets and Europe respectively. 

Although progress in healing the European situation has been “painfully slow,” Pitcairn noted that there is a world outside the European “melodrama” which deserves global investors’ attention.

The long-term prospects for the developing economies of Asia and Latin America are bright. However, in the short-term, “eyes have turned to the economic slowing in China.” Export growth will slow, the firm predicts, as China has “bowed to pressure” - largely from the US - to let its currency drift up from “artificially low levels.”

US economy like a “frustrating airport experience”

According to Dr David Kelly of JP Morgan, the US economy is like a frustrating airport experience. “After the tedious lines, security checks, and delays, there is a natural level of optimism when one boards the plane and the door is closed,” Pitcairn said.

“Finally, we think we are making progress. But then as the plane begins to back up from the gate, the captain makes an announcement that there is a 45-minute wait for take-off. Like those maddening afternoons at the airport, our economy has made progress; it’s just not going anywhere soon.”

Most economic indicators failed to meet expectations in the US in Q2, with GDP and S&P earnings forecasts revised downward. “When you combine those weak economic reports with the uncertainty of an election year and add the fears of the ‘fiscal cliff,’ you find an environment devoid of the confidence necessary to spur capital investment and to drive the economy forward,” the firm said, adding that the fiscal cliff “threatens twin growth killers” - spending cuts and large tax increases.

But it’s “not all bad”

Pitcairn noted how the housing market - an important indicator - is improving. Progress in this sector has a “waterfall effect,” which boosts other areas of the economy too, the firm said.

Similarly, the global economic slowdown has taken the pressure off of commodity prices, resulting in a “marked easing of gasoline prices,” which benefits overall consumption in the same way a reduction in taxes does.

In terms of US equities, defensive sectors such as telecommunications, healthcare and utilities performed best. “On a relative basis, the US was the place to be,” Pitcairn said.

The fixed income market generally benefitted from the risk-off sentiment in Q2. The fixed income environment saw record low yields across all core sectors, as investors "aggressively" went after income and safety. "We expect this environment will continue as the Fed has signaled it has every intention of keeping rates artificially low for an extended period of time."