diverging paths

diverging paths

1Q15 Market Overview

Throughout the first quarter, we experienced considerable volatility and diverging paths for global investors. The wall of worry continued to focus on energy’s precipitous decline of 60% over the past year and a robust U.S. dollar which weighs heavily on the earnings of U.S.multinational companies.

On a more positive note, diversification prevailed in the New Year and helped investors make up for the unusual dispersions experienced in 2014. Although the gains were relatively modest in the U.S., international equities broke away from the pack as the European Central Bank finally resorted to bolder stimulus efforts to jump-start the lagging euro zone economy.

Looking forward, we are encouraged by an improving U.S. economy and the direction the Federal Reserve is headed. So far, they have been successful in removing stimulus and will now carefully consider the obvious need to raise interest rates. As the markets digest this reality, we will continue to take advantage of diverging market trends by rebalancing to target allocations while maintaining your desired risk level. This process typically involves harvesting gains or losses in the most tax-efficient manner possible and then re-allocating the proceeds to out of favor asset classes that offer more attractive long-term opportunities such as international equities.

U.S. Equity Markets

The U.S. equity markets limped to the finish line in the first quarter as volatility carried over into the new year; the Russell 3000 return was up 1.8% for the quarter. Mixed economic data towards the end of the quarter raised concerns about the strength of the recovery. In a recent report, the Commerce Department reported that the U.S. economy grew at a 2.2% annual rate (down from the annualized pace of 5% from July to September). Positive contributions were noted in fixed investments, exports and state and local government spending while detractors included imports. U.S. corporate profit margins fell slightly from record levels as U.S. multinational companies felt the weight of a stronger U.S. dollar considering that a one-third of the S&P 500 earnings are generated overseas. According to FactSet, earnings are expected to increase 2.2% in 2015. Consumers, in contrast, continue to benefit from the steep decline in fuel prices which should also slightly improve overall GDP growth.

U.S. Equity Markets

The U.S. equity markets limped to the finish line in the first quarter as volatility carried over into the new year; the Russell 3000 return was up 1.8% for the quarter. Mixed economic data towards the end of the quarter raised concerns about the strength of the recovery. In a recent report, the Commerce Department reported that the U.S. economy grew at a 2.2% annual rate (down from the annualized pace of 5% from July to September). Positive contributions were noted in fixed investments, exports and state and local government spending while detractors included imports. U.S. corporate profit margins fell slightly from record levels as U.S. multinational companies felt the weight of a stronger U.S. dollar considering that a one-third of the S&P 500 earnings are generated overseas. According to FactSet, earnings are expected to increase 2.2% in 2015. Consumers, in contrast, continue to benefit from the steep decline in fuel prices which should also slightly improve overall GDP growth.

International Equity Markets

International developed equity markets regained their footing in the New Year with a quarterly gain of 4.9% for the MSCI EAFE. The U.S. dollar gained additional ground against most major currencies to start the year which inflicted further damage to dollar-based investors. After experiencing more disappointing euro zone economic data, the European Central Bank (ECB) finally resorted to bolder quantitative easing actions and started their massive $66.3 billion per month bond buying stimulation program on March 9. Although this program isn’t likely to solve the euro zone’s problems overnight, it is a step in the right direction to defy the gloomy forecasts and begin reaping the benefits in the second half of 2015. In Japan, the “Abenomics” ambitious turnaround plan helped Japan emerge from its recession in the final quarter of 2014 as their economy expanded at an annualized rate of 2.2%. China continued to surprise the markets with additional easy money policy decisions and helped the MSCI EM post a 2.2% quarter gain. After two consecutive years of underperformance relative to the U.S. markets, both developed and undeveloped international markets continue to look more attractive for long-term investors as we move further into 2015.

Fixed Income Markets

Safety-minded investors gained additional ground during the quarter as the Barclays Aggregate added 1.6%. Against majority predictions, the 10-year Treasury yield declined from 2.17% on January 1 to 1.93% on the final trading day of the quarter. As yields decrease, bond prices with longer durations typically outperform since their existing yields become more valuable compared to newly issued lower yielding securities. This is exactly how the markets priced in this new reality during the first quarter, by rewarding the Barclays US Government Long with a 3.9% gain, Intermediate with a 1.3% gain and Short with a slight gain of 0.54%. In the international fixed-income arena, the JPM Non-US Unhedged posted a disappointing 4.1% loss under the weight of a hearty US dollar. The Barclays Municipal continued to reward tax sensitive investors trying to lessen the drag of new investment related taxes, gaining 1.0% during the quarter.