In 1987, U2 released a song titled “Running to Stand Still.” Although the song describes Dublin’s heroin epidemic in the 1980’s, the title could also describe the movement of the stock market through the first quarter of the year. The market has experienced heightened volatility, yet the S&P 500 finished the quarter up only 0.44%, while the Dow was -0.26%. The S&P 500 traded near an all-time high on March 2nd, and then subsequently fell 2.5% the following week. From February 18th through March 30th, the S&P 500 failed to generate two consecutive positive trading days. This 28 day stretch is extremely rare for the market, but offers some promise. The last 6 times the market has experience a streak of 25 days or longer without back-to-back gains, the market has averaged 2.77% for the 1 month following the end of the streak.
While one single event cannot be blamed for the increased volatility, continued uncertainty around Fed policy and recent weakness in US economic data have been big contributors. Federal Reserve Chairman Janet Yellen has reiterated that future Fed policy will be data dependent. Her statement that the pace of interest rate hikes could “speed up, slow down, pause, or reverse,” certainly hasn’t helped ease the uncertainty.
Equity Markets 1st Quarter
US Markets are up 205% from March 2009 lows while S&P 500 earnings per share (EPS) are 13% higher than the 2007 peak. International markets have rallied 110% from 2009, yet EPS of the MSCI EAFE (developed) are still 25% below the 2007 peak. Any economic recovery overseas would fuel a sharp growth in earnings per share, which would translate into stronger international market returns. According to Yale University economist Robert Shiller, stocks in Europe and selected other international markets are currently one-half to one-third as costly as US shares.
The US Broad market advanced 1.84% during the 1st quarter, 2015. Unlike 2014, mid and small cap stocks are currently outperforming their larger counterparts. The S&P 400 (Mid) has gained 4.93% while the Russell 2000 (small) has advanced 3.99%. The NASDAQ, which is technology heavy, saw gains of 3.48% through the 1st quarter. International markets are off to a strong start to the year. The MSCI EAFE (developed) has gained 4.19% while the MSCI EM (emerging) index is up 1.91%; both leading the broad US market. Investors with currency hedged international exposure performed better than the index, compliments of a rising US dollar.
The Fed kept the Federal Funds rate unchanged at 0.25% at the conclusion of its March meeting. The economy is still working towards full employment and a targeted 2% inflation rate. Measures of labor market conditions, indicators of inflation, and other economic indicators will be monitored by The Fed to determine the appropriate time to start raising rates.
An aggressive stimulus program instituted by the European Central Bank has pushed investors into US Treasuries, bidding up prices and lowering yields. With the German 10 & 30 year bond yields trading at 0.19% and 0.597% respectively, US rates look attractive to overseas investors. Low global yields, coupled with a dovish Fed policy, should keep US rates in a tight trading range over the next few months.
US Treasury rates fell for the quarter, marking a 5th straight quarterly decline. The 10 year Treasury note fell 24.3 bpts to end the quarter at a yield of 1.93%, while the 30 year Treasury bond dropped 20.4 bpts ending at 2.535%. Volatility has appeared in the bond market as well. Fixed income in general had its best month in a quarter century during January; followed by the worst, February. A decent March finish led the BarCap US Aggregate Bond index to a quarterly gain of 1.61%. Municipal bonds have cooled off a little from their strong 2014 performance, but still netted a 1.01% gain.
Alternatives & Commodities
Benchmark US crude-oil continued its slide during the first quarter, falling 10.6%, settling at $47.60 a barrel. Brent oil, the global benchmark, slid 3.9% to settle at $55.11. High levels of US inventory have been a major contributor to oils downfall. Currently, stockpiles are at their highest level in about 80 years. Some analysts expect a slowdown in US oil production, due to a decline in the number of producing rigs, which could put upwards pressure on oil prices later this year.
Gold started the year at a price of $1,206. After a strong rally to $1,295 and a subsequent selloff to $1,150, gold finished the year relatively flat at $1,187.
The Fed removed the word “patient” from their most recent policy report; however, patient is what investors will need to be for the remainder of the year. The market is struggling to gain momentum and will most likely continue to be volatile. A stronger US dollar has a negative impact on multinational corporation profits, and a weakening in the oil markets puts a strain on energy company profits. Earnings for the first half of the year have therefore been revised lower. We feel US stocks will continue to grind higher, albeit with a continued increase in volatility. Improving economic data and a Federal Reserve policy that is still dovish help support this view. Investors should look to international markets for opportunities. Improvement in global growth and an easing in foreign central bank’s monetary policies can benefit international equity markets. Volatile markets can be uncomfortable for investors, but it is important to sort through all of the noise and remain focused on long term goals.