Market Overview: Second Quarter 2015
U.S. stocks were little changed for the second quarter. The S&P 500 Index is up only 1% for the year.
International stocks, however, as measured by the MSCI EAFE Index did better. After meaningful underperformance in 2014, international stocks are outperforming U.S. stocks so far, up 5.5%. The Eurozone, in fact, was up, and has so far logged double-digit gains year-to-date. This may seem like quite a surprise given the relentless headlines during the quarter regarding the crisis in Greece anxious creditor negotiations, name calling, referendums, brinksmanship and referendums. So let’s take a big-picture look to help explain.
It’s pretty clear to the experts that even as Europe prepares to loan another 85 billion Euros (close to $100 billion) to Greece, it is probably throwing good money after bad. There is little to no hope that Greece will be able to repay the 240 billion euros ($270 billion) it already owes investors, banks, the International Monetary Fund (IMF) and Eurozone countries. So why would creditors do it – why provide more bailout money to a country that likely won’t pay it back? The answer is fear of the unknown. Specifically, there is the fear that failure of the Greek banking system, an attempt to go back to the drachma would cause economic ruin in Greece. Then there is contagion fear, concern that the exit of one Eurozone member might lead to the exit of other struggling members such as Portugal or Italy and ultimately to the unwinding of the Union. There are also humanitarian concerns if Greece were to suffer a collapse. Finally, there is the terrorism threat. Europe doesn’t want to risk having a vulnerable failed state in its midst. For all the above reasons, the cost of keeping a dysfunctional Greece on life support for a few more years has been deemed to be worth the alternative.
There are two factors in play helping international stocks: quantitative easing and a strengthening U.S. dollar. Both Europe and Japan are embarking on quantitative easing to stimulate their economies – the same type of measures that the U.S. employed through 2014. Just as importantly, for various reasons, the U.S. dollar has been strengthening against most of the world’s other major currencies. Chart 1 below shows how the dollar has been rising steadily against six other major currencies. The strengthening dollar helps European companies and other internationally based corporations. Their goods and services become more competitively priced in the global marketplace. Therefore, greater corporate sales and greater corporate margins are possible.
The Bond Market
U.S. bond prices fell during the quarter as interest rates moved up. The yield on 10-year U.S. treasury bonds has now risen from a low of 1.63% in February to 2.35% by the end of the second quarter, a very substantial move. This caused the Barclay’s aggregate bond index to fall about 2% for the quarter. Bonds have suffered a slight loss year-to-date. Perhaps the U.S. bond market is finally anticipating an upcoming rise in the Fed Funds rate and a gradual return to more normal interest rate levels.
U.S. Dollar Strength
Oil and Energy
Crude oil prices, despite rallying to the $70 range at one point during the year, closed the quarter little changed and right at $60, trending lower towards the end. There are significant forces bearing down on oil prices and consensus seems to be building that oil may stay range bound-possibly for years to come. Chart 2 below shows that oil has settled into a range for the mid -$50’s to mid - $60’s since plummeting from over $100 in June of, 2014.
Brent Crude Oil Performance
Other articles that appeared in the Second Quarter issue of Your Family CFO Report includes Economic Overview and Asset Class Summary. Please call us anytime with questions at 404-874-6244 and feel free to pass our message along to friends.
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