Closing Prices 03/31/2015
S&P 500 INDEX.................................................
US TREASURY BOND
Current Yield - 10 year bond.................................................
Current Yield - 30 year bond.................................................
Past performance is no guarantee of future results and investing involves risk,
including the possible loss of principle.
A consolidative, range-bound market resulted in minimal movement for the major U.S.
equity indices. However, accommodative global central bank actions, coupled with the
hint of higher short-term rates at home, resulted in another sizeable shift in currency
markets. Many international indices responded with money flows accelerating to equity
and fixed income markets. The strong dollar is wreaking havoc on globally diverse
corporations as earnings translations to our home currency are likely to take a big bite out
of reported earnings. For the quarter, The Russell 2000, whose smaller capitalization
constituents have less international revenues, outpaced their larger brethren with the
index advancing 4.3% compared to the S&P, including dividends, returning 1%. The
DJIA and Nasdaq rose 0.3% and 3.9%, respectively, during the quarter. As noted, global
markets led the way with China’s Shanghai Stock Exchange Composite realizing a
sizeable gain of 16%. The consistent, albeit slow, expansion in the U.S. along with higher
yielding sovereign bonds has led to a continued attraction of foreign capital as the U.S. Dollar Index rallied 9% during the quarter.
This is now the third quarter in a row of 5%+ returns relative to a basket of currencies, with the Euro leading to the downside. This
rare occurrence should lead to further disintermediation amongst those who have significant currency exposure and those who do not.
Digging deeper into sector performance, Healthcare and Consumer Cyclicals led the way with 6.6% and 4.8% returns. Utilities and
Energy were laggards with losses of 5.2% and 2.9%, respectively. Growth stocks posted their largest quarterly gain relative to value
stocks as investors reached for beta and shunned dividends. Oil prices slowed their descent but still dropped another 13.4% and are
now off 54.24% from last year’s highs. The unemployment rate improved significantly over the past year, moving from 6.7% to 5.5%
as of February. Gold ended essentially unchanged at $1,183.l0 but had a $153 trading range throughout the quarter.
With the Federal Reserve ending its Quantitative Easing program last year and recently altering their projections to lower growth for
longer, investors are now left playing a guessing game as to when rate hikes will begin. More importantly, the trajectory and speed of
those rate hikes will determine how equity and fixed income markets perform over the coming quarters. Incoming data is already
showing signs of a slowing U.S. economy. The aforementioned currency effects are taking a bite out of our export market and keeping
a lid on inflation statistics, even after taking out the sudden drop in energy prices. As was the case last year, most economists have
called for higher long-term rates prior to the start of the year. The 10-year Treasury yield has, yet again, proved fickle as yields
dropped from 2.17% to 1.92% over the past three months. Most fixed income benchmarks provided positive returns as the Barclays
Capital Intermediate Government/Credit Index and the Barclays Capital Intermediate Aggregate Index gained 1.5% and 1.6%,
Industrial production, durable goods and a multitude of economic reports are showing an abrupt slowdown in our current export
market. We have now seen core orders decline for six straight months after February’s report. Exports were a major source of
growth coming out of the recession, but the strong rebound in the dollar has resulted in our goods becoming too expensive on an
international scale. This should take a bite out of expected GDP estimates.
In January of this year, analysts on average expected profits in the first quarter to increase by a modest 3.6%. With the huge
spike in the U.S. dollar and lower energy prices, estimates are now calling for a 5.3% decline in profits. This nearly 9%
reduction is the largest quarterly drop in 5 years. It will be tough to see the overall market continuing to post considerable gains
if final reported earnings show a decline this year. International growth will have to markedly perk up in order to see profit
expansion in the near future
The final update to the 2014 GDP report showed a modest 2.4% advancement. We expect a more normalized trend going
forward, likely in the 2.5% - 3.0% range with an upward bias if the currency market begins to normalize. However, first quarter
GDP should come in under this range as the impact of softer earnings, slowing wage growth, an increased saving’s rate, West
Coast port issues, historically bad weather for a large portion of the East Coast and a lagging export market take the rate closer
to 1%, with risk to the downside. Interest rates should remain range bound, with a slight bias towards the lower end if oil prices
continue to keep inflation metrics depressed in the near-term and earnings come in line with the currently reduced estimates.
On the International side, the London FTSE 100 posted a new all-time high during the quarter. The Frankfurt DAX also
made new all-time highs after their recent 41% advance. Japan’s Nikkei is breaking out of a 15 year base while numerous
other developed nations' equity indices are showing signs of strength. Global interest rates remain extremely competitive
as Germany, Japan, Italy, and United Kingdom 10 year yields are at 0.18%, 0.40%, 1.28% and 1.58%, respectively, while
the U.S. comparable closed at 1.92%. Several European five-year sovereign debt rates are actually negative! This should
keep yields tame locally and may even cause a further drop in the trading range. It’s hard to argue against owning equities
when the largest stock markets in the world are all breaking out together and the alternatives are underwhelming.
Fed Fund futures market is now pricing an initial rate hike late in the second half of this year, but the timing could
certainly be altered. More important for investors is the pace, frequency and size of those rates hikes, not the absolute
timing. It is clear the Federal Reserve would like to normalize policy; however it is unlikely they will do this in the face of
slowing wages, tame inflation and sub-par growth. These areas will have to show improvement over the coming months
for the “data dependent” Fed to start raising short-term rates. Winning sectors and companies are quite different in these
scenarios. Rising long-term rates would be a boon to banks’ net interest margins, while lower rates would continue to keep
capital cheap, therefore benefitting consumers and corporations dependent upon debt issuance.
We have executed some minor pruning of the portfolio as we transition to an eventual attempt at normalizing interest
rates could take longer than expected. The substantial moves in currency markets are throwing a wrench into economic
data and have resulted in a hesitant Federal Reserve. Global economic conditions are slowly improving and need to
continue if we are to collectively benefit. A focus on global macroeconomic conditions should allow us to book profits in
a more volatile investment environment. We remain focused on high quality companies, which have clean balance sheets
and stable dividends. Stock selection will remain paramount. Fixed income investors will continue to benefit from
exposure to high quality securities with a neutral duration.
We appreciate your confidence and business. Please do not hesitate to call us if
you have any questions or if we can be of
Your financial needs are our highest priority. To meet with a Wealth Management Advisor, call 866.309.2020 or 800.225.3512.