Second Quarter, 2015
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.