DWM 2Q15 Market Commentary

Sideways fireworksIt was a special year for me. Instead of just my normal one annual firework viewing, I was able to see a number of displays this season including one in Kentucky, one in Wisconsin, and one in my hometown of Glen Ellyn, IL. On top of that I was able to witness the market fireworks that came early in June. Usually we wait until the 4th of July for fireworks. But not this year as the second quarter was chugging along somewhat quietly until “bang goes the dynamite” in the last week of June. The Greek turmoil was the cause of these fireworks and it sent global markets tumbling and cut the year’s gains to almost nothing. It’s unfortunate as we think that “Grexit” is overblown – please see our recent blog for more on Greece.

Let’s take a closer look into each asset class:

Equities: The most popular index, but generally not the best one for proxy use, the S&P500 managed to eke out a small gain for 2Q15, +0.28%, and is now up only 1.23% for the year. The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered 0.35% for the quarter and has returned 2.66% Year-To-Date (“YTD”). International funds continue to outperform domestic ones in 2015.

Fixed Income: It was a difficult quarter in bond land as we saw the Barclays US Aggregate Bond Index fall 1.68% and 0.10%, 2Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index drop 1.18% and 3.08%, respectively. Corporate bonds really suffered as represented by the iBoxx USD Liquid Investment Grade Index, off 3.82% for the quarter and now down 1.31% for the year.

Alternatives: It wasn’t a great quarter for stocks or bonds and unfortunately not a good one for alternatives either. A lot of the areas that did well in the first quarter stumbled this time around, for example, managed futures and real estate. MLPs were also down but we believe MLPs are mistakenly getting lumped into the “sell-anything-related-to-oil” trade. There were some bright areas. For example, there are insurance-linked (“catastrophe”) funds that continue to chug along with positive returns. They have really no correlation whatsoever with the financial markets as they are tied to natural events instead. We love non-correlation like this!

So at the half way point of 2015, many investors are sitting with small, albeit positive net gains for the calendar year. We are cautiously optimistic about the second half as there are many positives out there including:

  • The US economy is definitely headed in the right direction – unemployment and wage data keep improving. We are expecting a modest pick-up of growth in the second half.
  • Even with the Fed poised to start raising rates later this year – a sign of US economy strength – comfortably low US inflation should continue and is good news for American businesses and consumers. It also lends support for stocks.
  • Outside of the US, central banks are easing which usually is a catalyst for global markets.

That being said, beyond Grexit, there are other headwinds including:

  • China’s stock markets have been in extreme whipsaw lately. Hopefully there is no spillover effect for the rest of the world.
  • Large cap domestic stocks as represented by the S&P500 are a little pricey. The S&P500 finished 2Q15 at 17.9 times Trailing Twelve Months (“TTM”) earnings. That’s higher than the 15.7 average for the last ten years and higher than the 17.1 at the start of the year. Frankly, US stocks have risen so fast since the financial crisis of 2008 that future gains are likely to be weaker than historical averages. (On the flip side, a lot of the international markets look relatively cheap.)
  • The Fed, via its unprecedented QE program, has created this artificial low rate environment which has led to recent major volatility in bonds. Not only should we expect this to continue, but it to lead to increased volatility in other asset classes. Furthermore, nervousness is abundant as the Fed tries to unwind this artificial un-natural setting.

In conclusion, the “fireworks” may continue and keep us on our toes. The market doesn’t always go up. We need to remember to be patient when quarters, and perhaps years, like this come along. It’s important to stay disciplined, to stay focused on the long-term, stay invested, and not let emotions drive irrational behavior based on short-term events.

In closing, the best firework display I saw this year was the one last week in Kentucky. It was amazing! Besides being kicked off by a 15 minute video that gave thanks to our troops, the fireworks were synchronized to music from AC/DC to the theme song from Frozen, “Let it go!” Unlike the other fireworks events I attended, only this one had a unique set of fireworks that actually go up, make a huge bang, and then go sideways. Yes, sideways, as in totally horizontal for some time. Frankly, I think it may be appropriate if our markets moved like these fireworks: up for a short while and a healthy move sideways…

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT