Coming into 2015, a major theme for the equity markets was an expected increase in volatility during the first quarter. Indeed, the past three months have been anything but consistent for investors. The benchmark S&P 500 index slid 3.1% in January then leapt 5.5% in February. The index did record some significant day-to-day increases as we moved through March, but ultimately finished the month down 1.7%, leaving it up 0.4% for the year.
At the mid-March monetary policy meeting, Federal Reserve officials lowered their outlooks for growth and inflation, leading financial markets to expect that the Fed will begin to raise short-term interest rates later and more gradually once that process starts. Adding to the confusion, the Fed said it would begin debating rate increases at the June policy meeting. That doesn’t mean the Fed will raise rates in June. Rather, officials are signaling that it’s a return to “business as usual” following a period of extraordinary accommodation.
“Recent economic data reports have painted a weaker picture of first quarter GDP growth, but we should see a rebound in the second quarter. Still, there’s a lot of uncertainty in the near-term outlook, which may hurt investor sentiment,” noted Raymond James Chief Economist Scott Brown in his recent commentary.
The dollar continued to strengthen in the first quarter, reducing prices of imported raw materials and finished goods, which provided consumers with a significant short-term boost in purchasing power. Strong job growth and low gasoline prices should help propel consumer spending through the spring and early summer. However, the strong dollar has reduced corporate earnings from abroad, which has some repercussions for capital spending.
Job growth remained strong in early 2015, led by increased hiring by small and medium-sized firms. The labor market should continue to improve in the months ahead, but we may see some moderation in the pace of job growth.
Weaker local currencies, accommodative monetary policies, and low oil prices should eventually help the economies in the rest of the world to improve. However, heightened geopolitical tensions and financial issues in Greece could have negative impacts, and significant downside risks remain.
Brown explains, “If the situation in Greece doesn’t blow up or get resolved soon, it could drag on, with headlines generating some volatility for U.S. financial markets. At the same time, the U.S. economic fundamentals are getting better.” Michael Gibbs, director of equity portfolio & technical strategy, adds that “despite headwinds and higher volatility, we expect U.S. equities to hit higher levels this year.”
Catalysts including the actions of central banks, the impact of a rapidly rising U.S. dollar, and unsolved political issues have not been enough to totally derail the bull market, which celebrated its sixth birthday this month. Although the market may remain in a similar pattern of higher volatility in the coming months, we feel a solid U.S. economy will help stocks overcome the setbacks and continue to grind higher.