This is our second quarterly review of the markets for 2015. As you know, we do not believe in making forecasts, but we comment on cross currents influencing the markets. As usual, our goal is to look at recent market results, put them in perspective, and see how that experience should set our expectations going forward.
This month’s post (written in July 2015) looks at the following topics:
- 2015 Q2 Markets Review
- Summary of Returns
- Factors Influencing Performance
- What Does all This Mean?
- For Greece
- For You
2015 Q2 Market Review
Summary of Returns
June, the second quarter and year-to-date results can be described as lousy, lackluster or not bad, depending on how one’s portfolio was positioned:
- June was a lousy month, especially for anything interest-rate sensitive
- The second quarter was lackluster, but painful for REITs, MLPs and bonds
- Stock market returns were not bad for the year-to-date, especially for US midcaps and small caps, non-US stocks and emerging markets
- Twelve-month returns are not shown, but the US continues to lead non-US markets over that period
|Market||Index||June||Q2 2015||2015 YTD|
|Large Cap||S&P 500 Index||-1.9%||0.3%||1.2%|
|Small Cap||S&P Small Cap||1.0||0.2||4.2|
|Non-US Developed Markets||MSCI EAFE||-2.8||0.6||5.5|
|Emerging Markets||MSCI Emerging Mkts.||-2.6||0.7||3.0|
|US Bonds||Barclays US Aggregate||-1.1||-1.7||-0.1|
|REITs||S&P US REIT||-4.5||-10.4||-6.1|
|Gold||Dow Jones-UBS Gold Sub index Total Return||-1.5||-1.1||-1.3|
|Commodities||Dow Jones-UBS Commodity Index TR||2.1||4.8||-1.5|
Sources: AJO Partners, Factset, Dow Jones Indexes
Factors Influencing Performance
Greece and Possible Rate Increases
In our last quarter’s market review, we said we should expect to see continued volatility as the market tries to anticipate Federal Reserve policy. That is pretty much what we have experienced in the second quarter, which has depressed sectors which pay dividends and hence are more rate sensitive. While there are troubles not only in Greece, but notably China, the US economy seems to be slowly climbing out of a deep hole and exiting the funk it entered just a few months ago. This has caused investors to anticipate a rate increase by the Fed.
Investors have focused on positive news including the pick-up of job creation in April and May, according to data provided by the U.S. Bureau of Labor Statistics, as well as the faster pace of housing sales in the all-important spring selling season (National Association of Realtors, U.S. Commerce Department). They also point to the willingness of consumers to spend (U.S. Bureau of Economic Analysis).
That’s a plus for S&P 500 company profits, which are forecast to rise a modest 2.2% in Q2 versus one year ago, compared to an estimated decline of 2.8% expected at the start of the quarter (Thomson Reuters). These are all contributing factors to US outperformance, especially in the mid and small cap sectors which are viewed as less sensitive to overseas economies.
Europe Continues to be a Big Factor
Europe continued to be in the headlines, much of it attributable to Greece and its continued debt problems. Since this country has been in the news so much lately, we will attempt to put those events in perspective.
Greece is a small nation in southern Europe with a small economy. In 2014, the U.S. exported $773 million in goods to Greece. That compares with a U.S. economy that totals over $17 trillion (U.S. Bureau of Economic Analysis). Greece is a beautiful country that is rich in history and culture. However, from an economic standpoint, Greece should not have a large effect on the U.S. economy.
The credit markets, the financial markets, and the banking system are another issue, though. In these terms, Greece’s inability to address its insolvency could have an impact at home.
Should Greece’s ongoing debt problems be a surprise? Well, not for students of economic history. You see, since Greece became an independent nation in 1829, it has been in default or rescheduling its debt 51% of the time through 2006. That statistic comes from analysts at First Trust.
This most recent crisis started in 2009, so financial markets have had plenty of time to prepare. At least that is the prevailing wisdom.
What’s different this time around is that Greece no longer has an independent currency – the drachma. Instead, it is part of the 19-nation European bloc that shares the euro.
No nation that has traded in its old currency for the euro has ever torn up the contract or has been forced to give up the euro. Such an event, if it were to occur, creates a heightened level of uncertainty because markets are woven together.
Short-term, stocks do not like added uncertainty and that accounts for the nearly 2% selloff in the Dow on June 29 (MarketWatch).
But let’s put that into perspective. A 350 point daily loss in the Dow does grab headlines, but it is modest when compared with the 4.4% drop registered the day after Lehman Brothers collapsed in September 2008 (Wall Street Journal). Furthermore, the dollar, which we might have expected to surge on safe-haven buying, was little changed against the euro. That could change in the days ahead as this is good short-term barometer of risk.
What Does All This Mean?
Although Greece and the European Union seem closer to a solution lately, the situation continues to be tense and extremely fluid. Greece seems to be agreeing to creditor terms, but based on previous events, anything is possible.
Should it eventually come to a default, the general consensus suggests it will not create treacherous conditions for global financial markets. That would not have been the case in 2010 or 2011 but may be the case today since markets have had time to adjust.
It’s a different matter for the country itself. Should Greece need to exit the EU and begin using its own currency, it would create very difficult conditions for an already stressed Greek population, as was suggested in recent report released by the Bank of Greece. Yet, a much-devalued drachma could help spur growth down the road.
The financial plans we recommend take into account bumps in the road. Because no one knows the future with certainty, it sometimes surprises us when we get big daily moves. Stepping back and taking a broader perspective, it really shouldn’t.
As counseled on repeated occasions, look past the daily gyrations and keep your focus on the financial plan. The long-term, disciplined investor is the one who has historically been rewarded.
While markets have been reasonably calm over the last four years, we will eventually hit a rough patch, which could be caused by Greece or by something else entirely. While stocks should eventually recover from a decline (that has been the trend over the last 200 years), I want to be sure you are comfortable with such volatility. If not, let’s please talk.