Groundhog Sees His Shadow
1Q 2015
Despite plenty of fears that would send any varmint headed for the safe confines of its hole, stocks had a pretty good showing in the first quarter of 2015, although there was a high degree of dispersion (among different sized companies, factors, and sectors). The S&P 500 finished the quarter modestly higher, with a +1.0% total return, which was respectable given the early hole we found ourselves in (-3.2%) ten trading days into the New Year. Mid-caps and small caps beat their big brother, at +4.0% and +4.3%, respectively. The continued rise of the US dollar caused some of the discrepancy between large caps and others, given that large multinationals tend to export more internationally than their smaller rivals, and those exports suffer headwinds when domestic currencies strengthen. Regardless of size, growth stocks beat value stocks handily for the quarter, especially in the small cap space (+6.6% vs. +2.0%, respectively).
In global markets, the world saw escalated military action against ISIS, a power vacuum in Yemen that renewed tension between two Middle East heavyweights (Saudi Arabia and Iran), Iran backtrack on its agreement to hand over its nuclear stockpiles, and the new Greek government take a page from American brinkmanship by taking the debt negotiations right up to the edge of default before capitulating to new EU terms. Despite all those fears and thanks to the stimulative policies by global central banks (e.g. Quantitative Easing in Europe, “Abenomics” in Japan, etc.), international markets moved significantly higher, especially in their local currencies. However, due to the continued (albeit slowing) strength in the US dollar, about half of those international gains were lost in translation back to dollars (Euro, Yen and others fell in value vs. the dollar). The good news was that even despite the weakening of foreign currencies, international investments largely outperformed the US stock markets for the quarter, with the MSCI EAFE (developed markets) +5.0%.
The biggest theme in bonds was indecision in the path for interest rates as the markets wrestled with the balance between three key issues: 1) the timing and trajectory of higher interest rates (we know the Fed will hike rates eventually, it’s only a question of when), 2) the strength of the global recovery, and 3) geopolitical concerns. The ten-year Treasury began the quarter at 2.17%, fell to 1.68%, then climbed back to 2.24% before ending the quarter lower at 1.94%. That left the Barclays Aggregate Bond Index with a +1.6% return in the quarter with riskier fixed income sectors (e.g. high yield, emerging market debt) performing slightly better.
During the quarter, we witnessed slightly higher volatility (see chart below), mostly associated with the Federal Reserve speculation and geopolitics. As we exit the colder season of skittish groundhogs, and shift to warmer spring and summer thoughts, we would note that it has been awhile since the market saw its own shadow (a 10% correction was last experienced in December 2011). With that in mind, we remind clients we will stay disciplined and re-balance accordingly, especially if/when markets offer volatile opportunities.
