At the end of every quarter, The CFG Wealth Management Investment Team provides a Quarterly Market Commentary. This report focuses on what’s going on in the capital markets this quarter and provides our perspective and advice.
The quarter began with the continuation of headlines out of Greece, and the real possibility of a Greek exit from the European Union. After months of contentious negotiations, capital controls, a missed payment to the International Monetary Fund and significant economic and financial damage, Greece reached a deal with creditors and the crisis subsided, for the time being anyways. However, a month later, global financial markets were once again thrown into turmoil with the surprise devaluation of the Chinese yuan, which sparked a sharp sell off in the Chinese stock market with the Shanghai Composite Index falling 8.49% in a single day of trading following the news. The events in Chinese markets and fears of a global economic slowdown sent US stock prices abruptly lower, with the S&P 500 Index falling 10.71% over just seven trading sessions and into official correction territory for the first time in over three years. It had been one of the longest streaks on record without an official correction, so some might say the market was due for one, but that certainly didn’t make the experience any more pleasant for investors.
In September, the Federal Open Market Committee decided not to raise interest rates, even with strengthening domestic economic fundamentals and an unemployment rate that fell again in the month of August to a post-recession low of 5.1%, siting “recent global economic and financial developments” that may have the potential to restrain economic activity and “put further downward pressure on inflation in the near term.” Fed chair Janet Yellen noted concerns about the slowdown in China and other emerging markets. The timing of an inevitable rate hike by the Fed is now as uncertain as ever, but we are still leaning towards the Fed making the first rate hike since 2006 before the end of the year.
For the quarter, Large Cap stocks as measured by the S&P 500 Index fell 6.4% with Growth modestly outperforming Value, and with the Energy and Materials sectors leading the way down as the global commodity sell off picked up steam. Small Cap stocks fared worse, with the Russell 2000 Index falling 11.9%. International stocks were not spared the selling either, with the MSCI EAFE Index, which is primarily composed of developed international countries, down 10.2%, and the MSCI Emerging Markets Index getting hit the hardest with a decline of 17.8%. The bond market experienced a flight to quality during the quarter, with riskier areas of the bond market experiencing modest losses and higher quality bonds seeing small gains. Overall, the Barclays Aggregate Bond Index rose 1.2%.
During times like these it is as important as ever to keep your sights set on the big picture and on each of your individual long term objectives. Your tolerance for risk and the allocation of your assets often have little correlation to the markets. Risk tolerance and asset allocation typically vary with your age, income, life stage and a myriad other factors, not market volatility. That’s not to say your risk tolerance and asset allocation never need adjusting – they will as your life circumstances evolve over time, but not in response to temporary market conditions. Long-term investing and financial planning look past these periodic fluctuations in the market. Typically, a thorough financial plan requires little adjustment due specifically to market gyrations. The changes that really matter to your financial plan are typically those that take place in your own life.
We continue to evaluate our strategic investment models and your accounts rigorously to ensure that they are properly allocated given your specific investment objectives, tolerance for risk, time horizon, and other factors. At this time, we do not feel a change in our core strategy is necessary. However, we continue to monitor the situation in the markets closely and will notify you if we feel a shift in investment strategy should be considered. If you have any questions about your account, or if you’d like to schedule a review or simply chat about the markets, please don’t hesitate to call our office at (858) 550-3960 or (800) 884-5121.
The second quarter of 2015 ended with Greece grabbing center stage and dominating news headlines. After years of kicking the can down the road, the Greek debt crisis flared up once again, this time with renewed vigor as Greece implemented capital controls and closed banks to stem a currency flight while engaging in negotiations with the European Union to reach a new aid deal. Uncertainty surrounding a possible exit from the Eurozone wreaked havoc on global financial markets and US and International equities ended the quarter on a down note. Despite this, US Large Cap equities ended the period slightly higher, with the S&P 500 posting a gain of 0.30% for the quarter. Small cap stocks as measured by the Russell 2000 saw a similar gain of 0.40% for the quarter, while developed international stocks fared slightly better with a gain of 0.60%. Bond yields around the globe rose substantially during the second quarter amid stronger economic data and reduced deflation fears, with most fixed income sectors seeing losses. In the US, the Barclays Aggregate Bond Index fell 1.7% on the quarter and was the index’s first quarterly loss since 2013.
While the summer stock market swoon appears to be upon us once again, and with the possibility of a real market correction is on everyone’s mind, we remain constructive on the global markets and continue to be cautiously optimistic through the remainder of the year. Looking ahead to the third quarter, attention will again shift to the Federal Reserve and when they may raise interest rates for the first time in nine years. However, markets do seem to be excessively obsessed with the impact a rate hike will have on market returns. These concerns may be overblown, as historically, when a rate hike occurs due to a strengthening economic conditions, U.S stocks tend to perform just fine. Based on nine interest rate cycles since 1971, the S&P 500 averaged returns of 6.7% twelve months following the initial rate hike.
We are not making any adjustments to our portfolio models for the quarter, and have deferred asset allocation rebalancing for the time being to see if a tactical opportunity arises down the road a bit. As always, we continue to monitor your investments closely and will notify you if we feel a shift in investment strategy should be considered.
The stock market continued its march higher in the first quarter of the year, although it had to show some resiliency to get there. The volatility spikes we referred to in our 2014 market recap letter played out to a degree during the quarter, with the S&P 500 Index experiencing a 3% decline in January, a 5.75% gain in February, and another 1.58% decline in March, ending the quarter with an overall gain of 0.95%. Thanks in part to the strong U.S. Dollar, Small and Mid Cap stocks beat the S&P handily during the quarter with gains of 4.32% and 3.95% respectively. This is a trend that we feel may continue throughout the year as the strong dollar takes its toll on larger multinational companies.
Coming off a rather weak 2014, International equities experienced a turnaround and saw significant gains during the quarter, with the MSCI EAFE Index up 4.88%, and emerging markets stocks seeing some strength for the first time in several quarters with a gain of 2.24%. This turnaround was driven primarily by the announcement of a quantitative easing program by the European Central Bank (ECB), with a plan to purchase 60 billion Euros worth of bonds. We believe the Eurozone may be in the early stages of an economic recovery, which could lead to International stocks outperforming U.S. stocks this year for the first time since 2012.
Much of the market volatility during the quarter was based on news and speculation on the timing of when the Federal Reserve may raise short term interest rates, while some mixed economic data and continued choppiness in the price of oil played a part as well. The words and actions of the Federal Reserve will likely continue to be a source of market volatility in the months ahead, but we remain optimistic on equity values with support coming from a strengthening consumer and lower energy prices. The global recovery and U.S. economic data will continue to be in focus, but despite the uncertainty, we see U.S. equities remaining resilient.
As always, we continue to monitor your investments closely and will notify you if we feel a shift in investment strategy should be considered.