Quarterly Market Update – 1Q 2015 By: Gabriel PotterMBA, AIFA® 2015.04.06

Key news stories

We are grateful the first quarter of 2015 has seen a relative slowdown of geopolitical affairs and obscuring governmental interference.  As they say, “no news is good news”.  Of course, the world never stops completely.  Political positioning is getting started for the 2016 elections.  Ongoing scuffles and negotiations with Cuba, Iran, Venezuela, and Russia continued through the quarter.  However, these stories impacted the news cycle more than US economic fundamentals.  Governmental actions suggested greater clarity, with the Federal Reserve dropping “patience” from their standpoint on interest rate increases, furthering the implication of a summer rate increase.  Moreover, the political capital for new initiatives is absent, suggesting status quo policies at least until the next election cycle.

Fundamental factors – employment improvement, manufacturing output, productivity, energy, and labor prices – were mixed, as was market performance.  As a reminder, many Wall Street shops called for a mid-year correction in 2015, but long-term investors shouldn’t be worried about deep overvaluation.  Ebullient market jumps may be entertaining to watch (and participate in), but the ongoing review of fundamentals (with sobriety that only comes from time) makes us more confident in the market’s long-term value, despite tepid returns from time to time.

Equities

Continuing trends from last year, growth is beating value.  Also, the US dollar continues its rise relative to other currencies.  However, the underlying strength in European economies had the advantage of recovery, which offset some of the currency weakness.  The Eurozone showed resilience from challenges, notably including the Greek election of the populist Syriza party and their challenge to EU austerity programs. 

All index performance values are for the 1st quarter of 2015.

  • US Large Cap Growth - Russell 1000 Growth:  3.84%
  • US Large Cap Value - Russell 1000 Value:  -0.72%
  • US Small Cap Growth - Russell 2000 Growth:  6.63%
  • US Small Cap Value - Russell 2000 Value:  1.98%
  • Developed International Markets – MSCI EAFE:  4.88%
  • Emerging Markets - MSCI EM: 2.24%

Bonds

The relative market performance of equities is higher than fixed income, which means developed and emerging market performance can compensate for the weakness in their currency; this isn’t true for fixed income.  Moreover, the monetary policies of key countries (ECB, Japan) will have direct negative effects on the value of their fixed income vs. US dollar or British pound.

All index performance values are for the 1st quarter of 2015.

  • Barclays US Aggregate Bond:  1.61%
  • Barclays Capital US Intermediate Credit:  1.77%
  • Barclays Capital US Government:  1.60%
  • Barclays Capital US Gov’t/Credit Long Duration:  3.36%
  • Bank of America/Merrill Lynch High Yield Master II:  2.54%
  • Citi World Government Bond Index (non USD):  -4.36%

Alternatives

The 1st quarter looks like 2014 - continued.  Weak yields in a low rate environment continue to make REITs attractive while strong dollars and energy weakness continue to pressure commodities. 

All index performance values are for the 1st quarter of 2015, unless noted.

  • Real Estate - FTSE NAREIT All REITs:   4.05%
  • Commodities – Morningstar Long Only Commodity TR:   -6.03%
  • Inflation – Barclays US Treasury TIPS:  1.42%
  • Hedge Funds – Credit Suisse Hedge Fund:  1.87% (through 2/28/2015)
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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