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Market Commentary 1st Quarter 2015
Economy & Market Review
S&P 500 Index
Qtr 0.95%
Large US Stocks
Qtr 1.59%
Small US Stocks
Qtr 4.32%
Non‐US Stocks
Qtr 5.00%
Emerging Mkt Stocks
Qtr 2.28%
US Bonds
Qtr 1.61%
High Yield Bonds
Qtr 2.54%
Emerging Mkt Bonds
Qtr 2.04%
Commodities
Qtr ‐7.52%
Global Market PerformanceThe first quarter of 2015 was highlighted by a continued rise of the dollar, new lows in oil prices, quantitative easing in Europe, and the removing of a single word from the Federal Reserve's forward guidance.
The U.S. Economy continued to grow, though its pace appears to be slowing. GDP growth was 2.2% in the 4th quarter of 2014 after strong showings in the previous two quarters. Overall for 2014, the U.S. grew at 2.4% year‐over‐year. That is the best showing since 2010 despite a rough first quarter that was negatively affected by weather. Going into 2015, early indications show that GDP could be much lower in the first three months of the year. Interestingly, the 75‐year average growth rate of the U.S. economy is 3.6% per year. The actual growth rate of the economy, however, has reached 3.6% or greater in only 1 of the last 14 calendar years.
While the strong dollar and lower oil helped consumers, the two developments negatively impacted corporate earnings and the job market. A stronger dollar makes U.S. exports more expensive, which makes them less appealing to alternatives from other countries. In Europe, the ECB officially launched its own quantitative easing program in March and intends to buy $60 billion of sovereign bonds and other assets through at least September 2016. Year‐to‐date, it appears this decision has helped equity markets in the Eurozone.
The most recent jobs report from the Bureau of Labor Statistics showed an anemic growth of just 126,000 jobs added in March – the first time in over a year the economy hasn't added at least 200,000 jobs. Wages have been somewhat stagnant during this time as well. That may soon change with news that some large employers, such as Wal‐Mart and McDonald's, are raising wages due to competition. Whether this is the beginning of wage pressures across the country has yet to be known, but will be closely watched as it directly relates to inflation.
As it pertains to monetary policy in the U.S., moderated growth was not enough to stop the FOMC from removing “patient” from its outlook. This has led many in the media to assume this means the Fed will look to tighten, or raise short‐term interest rates, earlier than expected. While this may in fact happen, the reality that the U.S. economy has softened may push off an increase to a date farther in the future.
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Growth Outperforms
Value Outperforms
Market Commentary 1st Quarter 2015
U.S. Equity Markets
Russell 200 Value
Qtr ‐2.08%
U.S. Equity Style Performance
Russell 200 Growth
Qtr 3.13%
Russell 1000 Value
Qtr ‐0.72%
Russell 1000 Growth
Qtr 3.84%
Russell 2000 Value
Qtr 1.98%
Russell 2000 Growth
Qtr 6.63%
U.S. Equity Sector Performance (S&P 500)
‐10
‐5
0
5
10
15
Excess Rolling 12
Mon
th Return, %
2006 2007 2008 2009 2010 2011 2012 2013 2015
Growth Relative to Value (Russell 1000)
‐6 ‐4 ‐2 0 2 4 6 8
Qtr
Energy ‐2.85%Materials 0.99%
Industrials ‐0.86%Cons Discretionary 4.80%
Cons Staples 0.99%Health Care 6.53%
Financials ‐2.05%Information Technology 0.57%
Telecommunication Services 1.54%Utilities ‐5.17%
The first quarter of 2015 brought with it more volatility as the S&P 500 continued last year's pattern of setting a new high, selling off, and then setting fresh new highs. February's solid gains were bookended by two negative months. Overall, the S&P 500 only returned 0.95% for the three month period. As for other areas of the U.S. stock market, the Nasdaq Composite notched a 3.5% return and the small‐cap Russell 2000 was up 4.3%, which could be attributed to less of a reliance on foreign revenue. It was the first quarter in some time that showed a meaningful divergence between value and growth, as larger value companies were in the red and growth was across‐the‐board positive.
The energy sector continues to be hurt by lower commodity prices. Crude oil fell to the low $40s per barrel during the first quarter before finishing above $47. Also, utilities had their largest quarterly percentage decline since 2009. On the other hand, healthcare continued their outperformance with help from biotech and pharmaceutical companies. The increase in consumer confidence helped push the consumer discretionary sector higher.
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International Markets Outperform
U.S. Markets Outperform
Market Commentary 1st Quarter 2015
International Equity Markets
Non‐U.S. Equity Performance Foreign markets outperformed U.S. markets in the first quarter, which is something that hasn't been seen since the 3rd quarter of 2013. When converted to U.S. dollars, though, the outperformance was significantly reduced by the continued strength in the dollar against virtually every major currency.
The quantitative easing program that the European Central Bank embarked upon in the first quarter appeared to help stock returns, as the MSCI EAFE returned 5.0%. For the quarter, Japan was the best performing stock market among developed markets and helped the MSCI Pacific post a 7.71% quarterly return. The stimulus measures from Europe may continue to push their respective markets higher, as European multinationals have seen their competitiveness increase due to the fall of the Euro.
Despite expectations for slowing economic growth and a weakening market, China had the best return of any stock market in the world during the first quarter. This came at a time when China, along with other countries like India and South Korea, cut interest rates to curb slowing growth. Commodity‐sensitive countries, such as Brazil and Russia, struggled with the strong U.S. dollar.
Style and Regional Non‐U.S. Equity PerformanceNon‐U.S. Equity Returns Relative to U.S. (S&P 500)
‐50
‐25
0
25
50
Excess Return, %
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015EAFE EM (EMERGING MARKETS)
0
1
2
3
4
5
6
7
8
Total Return, %
Qtr
4.00%
5.97%5.64%
3.52%
7.71%
EAFE VALUE EAFE GROWTH EAFE SMALL CAP AC EUROPE MSCI PACIFIC
0
2
4
6
8
10
12
Total Return, %
Qtr
5.00%
Qtr
2.28%
EAFE EM (EMERGING MARKETS)
0
2
4
6
8
10
12
Total Return, %
Qtr
10.97%
Qtr
4.94%
EAFE (local) EM (local)
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3 Mo 6 Mo 2 Yr 5 Yr 10 Yr 30 Yr
Market Commentary 1st Quarter 2015
Fixed‐Income Markets
0 1 2 3
Qtr
BC Aggregate Bond 1.61%
High Yield 2.54%
Emerging Mkt Bond 2.04%
Corporate 1.89%
Mortgage 1.06%
Agency 1.27%
Fixed Income Performance
Investors continued to purchase U.S. Treasuries as volatility returned to the stock market and the ECB rolled out its QE program. The 10‐year Treasury yield fell over a quarter of a percent in the last three weeks of the quarter and the 30‐year reached an all‐time low of 2.25% in January. The yield curve continued to flatten as a result of the lower yields. Overall, Treasuries have seen their longest stretch of quarterly gains since 2003.
The broad fixed income market in the U.S. returned 1.61%, led by higher returns from corporate and high yield debt. TIPs and floating rate bonds have lagged due to a lack of inflation in the market. In Europe, multiple countries have had negative yield issuances during the first quarter. Germany, Italy and Spain all have aggregate yields of less than 1% and Germany's 10‐year yield is a paltry 0.15%.
Yield Curve
‐2
0
2
4
Excess Return, %
Qtr
0.79%0.29% 0.14%
‐0.69% ‐0.48%
High Yield Emerging Mkt Bond Corporate Mortgage Agency
Excess Performance to Treasuries
0
2
4
Total Return, %
3/31/2014 12/31/2014 3/31/2015
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Axia Advisory