The Quarterly Report: April 2015
The first quarter of 2015 here in the U.S felt much like that of 2014. Major market indices were virtually unchanged as falling energy prices, lower unemployment and rising consumer confidence were offset by a strong dollar and fears of a Federal Reserve interest rate increase. While domestic markets were unchanged, the global markets have finally joined the rally. Investors cheered the monetary policy of central banks around the globe by taking positions in both Europe and Japan.
"You’ve got a very accommodative Fed and decent profit growth…that’s about as good as it gets.”
- Jason Trennert, Chief Investment Strategist – Strategas Research Partners
Bonds continued to defy investor logic as a rally favored U.S. bond issues. The relative value of bonds here in the U.S. relative to yields in Europe and Japan keep investor demand for the safest asset class in the world near an all-time high.
Looking ahead, a close eye must be kept on the Federal Reserve as potential rate hikes loom. Monetary policy in both Europe and Japan may continue to buoy markets and the increase in volatility that became evident in the first quarter may be a theme the remainder of 2015.
Domestic Markets at a Glance
· The S&P 500 (The 500 largest companies included in the market) rose just 0.4% in the quarter. It was the 9th consecutive quarterly gain for the index.
· TheDow Jones (The 30 largest publicly traded U.S. companies) was down 0.3% in the first quarter.
· The NASDAQ (Over 3,000 technology and growth oriented companies) rose 3.5% for the quarter and spent time during the quarter flirting with a 15 year old record high.
Volatility was a prevailing theme throughout the first quarter as investors wrestled with the positives of falling unemployment, rising consumer confidence and increased consumer spending offset by a rising dollar and cautionary valuations. The S&P 500 Index closed up or down 1% on 19 occasions, the most since the second quarter of 2012, a theme that may continue this year.
The positive trends at work in the first quarter included lower energy prices. Crude oil prices are down 56% since last June helping to increase both consumer confidence and consumer spending. Employers also added 295,000 new jobs in February as the unemployment rate fell to 5.5%.
Working against the market the past three months has been the effects of a rising dollar. A strong dollar tends to hurt the profits of large, multinational companies that dominate both the Dow Jones and S&P 500 Index, making their products more expensive around the world. Interestingly, while smaller company stocks tend to outperform in early stages of a market rally, the Russell 2000 Index (small company stock index) has defied its historical record in 2015 by outpacing other market indices (rising 4%) as the smaller companies are less likely to be multinational and potentially less susceptible to the negative impact of a rising dollar.
"The U.S. Stock market looks the least attractive of the major markets. We’re not negative on it…we just think you’ll make more money outside the U.S. than inside.”
- Dennis Stattman, Manager, Blackrock Global Allocation Fund
Investors also spent the first quarter with a close eye on the Federal Reserve. In her semi-annual testimony before the Senate Banking Committee in February, Fed Chair Janet Yellen said a rise in interest rates would be considered on a meeting by meeting basis, citing sluggish wage growth and low inflation as concerns. Yellen reiterated in March that the central bank would proceed slowly in hiking rates.
While the market is considered fairly valued by many valuation measurements, volatility has become central theme for the domestic stock market. As investors continue to wrestle with potential stock purchases in the U.S. and abroad, a sideways market trend may continue, with specific sectors of the market providing opportunity, such as technology and healthcare.
Bond Markets at a Glance
· The Barclay’s Aggregate Bond index was up 1.6% in the first quarter.
· Theyield on the 10-year Treasury declined by 25 basis points to 1.92%.
U.S. government bonds rose to cap the fifth quarterly gain in a row; the longest winning streak in more than a decade. Investors have favored U.S. Treasuries for their relative value as yields in both Europe and Japan hit record lows.
"The yield differential between the U.S. and the rest of the world continues to drive foreign buyers into Treasury bonds.”
- Tom Roth, Executive Director – UFJ Securities
As evidence of investors hunger for yield/income, riskier (high yield bonds) lower quality bonds were up 2.5% in the first quarter.
While most believe that yields will grind upwards at a modest pace throughout 2015, MGO Investment Advisors continues to structure portfolios to limit interest rate risk in the face of rising rates.
Foreign Markets at a Glance
· The DJ Global ex-US stock index was up 3.1% in the first quarter.
· The MSCI Emerging Markets Index rose 2% in the first quarter.
European stocks made headlines in the first quarter as improving economic data, falling oil prices and unprecedented monetary stimulus launched by the European Central Bank provided comfort that stocks may rally on government spending. Concerns that Greece may exit the Eurozone had little impact on markets, with most countries enjoying double digit stock returns. That being said, a falling Euro, relative to the strong U.S. dollar has hampered returns when investments are converted back to the U.S. dollar. The MSCI Europe Index rose 12%....but just over 3% in U.S. dollar terms.
Japanese equities rose amid data showing that the country has officially exited recession. Strong corporate earnings coming on the heels of monetary stimulus by the Bank of Japan has the MSCI Japan index up 10% for the year, but again, hampered by the strength of the U.S. dollar.
Emerging markets were up marginally in 2015 with gains of 2%. Asian equities advanced on looser monetary policy while Brazil and much of South America retreated in U.S dollar terms.
In italics is a look back at some themes that MGO felt may be prevalent in 2015. While 3 months is hardly enough time for any long term market themes to take shape, we’re pleased to have structured portfolios to capitalize on these themes.
European Central Bank Quantitative easing. Weaker than expected manufacturing numbers has the world believing that Europe will likely slip back into recession. The ECB stands ready to take the steps necessary to ‘stop the bleeding’ and jumpstart growth throughout the region. MGO believes that the result will likely be an unprecedented easing in monetary policy. The region potentially looks to provide value to investors over the long term. Reprinted from 12/31/14.
Commentary: The European Central Bank stepped up with easing in monetary policy that has resulted in many of the counties within the region enjoying double digit stock returns. A strong U.S. dollar has negatively impacted foreign investments; yet, the results still outpace the U.S. market.
Increased volatility. Low volume and virtually no market movement caused volatility to hit record lows in the summer of 2014. A recent increase in volatility late in the 4th quarter of 2014 may be a precursor of things to come. As the political landscape becomes more dangerous, oil prices plummet and the dollar strengthens, variables around the world begin to impact the domestic market, creating greater volatility. Reprinted from 12/31/14.
Commentary: During the first quarter, the S&P closed up or down more than 1% on 19 occasions, the most since the second quarter of 2012. Volatility creates opportunities. MGO Investment Advisors is constantly looking to capitalize in inefficiencies in the market.
Low oil prices. Lower oil prices means less pain at the pump, in the short term, it’s a positive for American consumers. Excess supply from countries abroad coupled with domestic oil output at an all time high while recession and slow growth abroad threaten to limit demand for oil, create a recipe for low oil prices in 2015. Reprinted from 12/31/14.
Commentary: Oil prices were down another 10% in the first quarter of 2015. The relief from ‘pain at the pump’ has been a catalyst for increased consumer spending and consumer confidence, both play a role in future market expansion.
The first quarter gave us very little in the way of direction for the remainder of 2015. A little known fact, if the U.S market finishes 2015 ‘in the black’ it will be the first time that the market has ever generated a positive return in 7 consecutive years.
MGO Investment Advisors is cautiously optimistic that the domestic market can generate positive returns in 2015. Accommodative monetary policy may continue to provide positive economic data throughout Europe and Asia. As a result, MGO Investment Advisors continues to search for values in markets abroad.
The Federal Reserve will be watched closely the remainder of 2015 as rising interest rates may negatively impact bond funds.
MGO Investment Advisors will continue to seek opportunities that enhance investor portfolios as the year progresses.