Third Quarter 2015 Market Recap

Global stock markets experienced a number of low-scale tremors in August and September that seemed to shake the confidence of many investors. As with geological tremors, the events of the third quarter—increasing concern about China’s economy accompanied by a surprise Yuan currency devaluation, a subsequent tumble in global stock markets, and the Federal Reserve’s decision not to increase rates—are indications of a global economy that is not without its fault lines.

It is also the case that ups and downs should be expected as a typical part of any market cycle. In fact, the current market stands out for the unusually long time (six and a half years, to be exact) it has lasted without a bear market decline, defined as a drop of 20% or more. So while this round of market bumps has triggered the usual fear-driven news headlines, in our view nothing has broadly changed, except that foreign markets have gotten a bit cheaper and are a bit more appealing from a valuation standpoint. We would also note that while we’re not in the business of predicting downturns, we think it’s prudent to be prepared for them nonetheless. The reality of owning stocks is that occasionally, inevitably, we will experience declines of varying severity over time. For the quarter overall, stocks were down 6.5% while bonds rose 1.2%.

Another key ingredient in managing through market declines is helping you accurately assess your risk tolerances and investment objectives. If you are in an appropriately structured portfolio, there is no benefit to selling in a downturn. In fact, by doing so you risk selling nearer to the bottom and then missing the subsequent recovery.
We are likely to view downturns as potential buying opportunities—exemplified by our tactical moves since the end of September. This is based on our tactical asset allocation approach that centers on analyzing long-term fundamentals and valuations, while remaining sensitive to shorter-term portfolio risks. For example, emerging-markets stocks may have been the biggest losers in the recent downturn, but our return estimates indicate they are now poised to outpace U.S. stocks materially over the next five years across a wide range of economic scenarios.

In an uncertain world, it is impossible to confidently predict the direction of financial markets. But we can more confidently evaluate a range of possible scenarios in order to understand the scope of potential returns for one investment or asset class relative to another. Our objective is to always emphasize undervalued investments and de-emphasize overvalued investments while building a portfolio that we believe will deliver the highest long-term return in line with each client’s risk tolerance.

Second Quarter 2015 Market Recap

The second quarter concluded with a flurry of global economic news that rattled stock markets and cut into the quarter’s gains. Stocks are struggling to post gains in 2015. Very little price progress has been made as each quarterly closing price for the S&P 500 is near the preceding quarterly closing price. Greece was a major cause of market jitters at various points during the quarter, and particularly during the last few days of June as the country announced it would default on its month-end debt repayment to the IMF.

China was another source of news at quarter-end as the People’s Bank of China undertook a surprise rate cut, along with other easing measures. China’s economic growth has slowed as policy makers seek to contain overall credit growth and redirect the economy toward a more sustainable path. Closer to the United States, Puerto Rico announced at the end of June that it would be unable to handle full repayment of its municipal debt. All of these situations outside the U.S. were responsible for the increased volatility in the U.S. markets at quarter-end.

As we enter the third quarter, Greece will most likely move away from dominating investor attention, and the focus will likely shift to Fed policy and interest rates. With an improving, but still moderately growing U.S. economy (that is not triggering inflation), the pace of the Fed increase in interest rates would appear to be measured. Also, absent inflation, a sharp move higher in bond yields should not develop, in which case a premium valuation for equities is warranted. However, in an effort to avoid being a “blind bull”, our caution has admittedly increased with a multitude of issues at hand (The Fed and interest rates, European Union, current valuations, slowing earnings), leaving the market vulnerable to pullbacks and could be a catalyst for a correction, something on the order of a 10% decline. Based on history alone we are overdue for one. The S&P 500 has now gone almost four years or 45 months without at least a 10% decline, making this the third longest such stretch since World War II. Prior to this recent run, market corrections occurred roughly once a year on average. We note all of this, not as a short-term market prediction but as a plausible shorter-term scenario to be aware of and be prepared for.

Although investors should be aware of the vulnerabilities of a market in the current state, they should likewise not become too defensive or complacent.

It’s important to note that having a long “time horizon”, when owning stocks, is critical because inevitably there are going to be shorter-term negative surprises, and when these surprises occur investors should be prepared for increased market volatility given that markets often over-react to transitory shorter-term news or outcomes. In those moments, it is useful to remember that volatility is the shorter-term discomfort an investor must experience in order to earn attractive longer-term returns from owning stocks. For it is exactly those volatile market environments that can create compelling long term investment opportunities, in the form of tactical asset allocation opportunities for us and great stock and bond picking opportunities for the managers we use.

First Quarter 2015 Market Recap

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.

Fourth Quarter 2014 Market Recap

U.S. stocks advanced overall in 2014, but sounded a retreat for the first month of the year – not unlike what happened in the markets last January. And even though January was down last year, the domestic equity markets still turned in a decent performance for the year. Many market observers, including Raymond James Chief Investment Strategist Jeff Saut, had predicted a pullback during the first quarter of 2015 amid concerns about slowing global growth, declining oil prices, eurozone deflationary issues and the strong dollar’s effect on American exports.

The latest gross domestic product report showed the U.S. economy expanded at a slower rate than expected in the fourth quarter – a 2.6% annual rate compared to a 5% pace in the previous quarter. Lower gasoline prices are expected to provide a significant benefit to consumers and business in 2015. So, currently what looks good for the economy has created many cross-currents for the stock market. While we believe this is temporary, we also believe that volatility is back in the U.S. market in 2015. One of the cross-currents was the deflationary tone of the U.S. market being transferred from Europe to this country which has favored bonds because of the continual lowering of interest rates.

The only market that went straight up in 2014 was the S&P 500, such that valuations in this country are much higher than in places like Europe, China, India, etc. which appear to be a more compelling value than the U.S.

Third Quarter 2014 Market Recap

Recent stock market numbers may look a little scary – down 300 points one day and then up 200 points the next. It’s been a while since we’ve seen such volatility, which can raise fear in the minds of investors –especially when the general trend appears to be down. It doesn’t help matters when the media use words such as “plunging” and “tanking.”

After a long period of unusually calm markets, volatility has returned to the market. These levels of volatility have not been seen since November 2011. However, this is not unexpected; as many market analysts have been commenting on the possibility of 10%-12% pullback since July. Put into perspective, through October 16 the Dow Jones Industrial Average was down 6.73% from its September highs while the Standard & Poor’s 500 Index (S&P 500) was down 7.34%.

The increase in volatility reflects a number of concerns:
• Geopolitical tensions
• Slower growth in Europe
• Possible spread of Ebola

Downside risks to the global outlook include fear of Europe falling back into recession and the European Central Bank’s limited ability to support growth. Additionally, U.S. firms doing business in Europe may see weaker earnings, made worse by the stronger dollar. On the other hand, falling commodity prices, especially lower gasoline prices, should help support consumer spending growth in the U.S., Europe and nearly all other major economies, into 2015.

Our belief is the recent pullback, which began in mid-September, remains within the framework of a long-term bull market with years left to run, driven by a number of transformational forces, including:
• American creativity
• New energy development
• Unrivaled U.S. manufacturing depth
• Vast amounts of capital still sitting on the sidelines.

It is during times like these that the value of asset allocation and a diversified portfolio, including an appropriate mix of equities and fixed income investments, is most apparent. While equities have pulled back, bonds have rallied with the 10-year Treasury yield at its lowest level since mid-2013. Many market participants are seemingly viewing the United States as the last safe haven given the confluence of recent events. From September 19 to October 16, the S&P 500 declined 7.34%. In contrast, a diversified portfolio consisting of 60% S&P 500 and 40% Barclays U.S. Aggregate Bond Index declined only 3.59%.

Long-term investors should be looking at this time in the equity market as an opportunity. In market declines most stocks go down and attractive entry points are likely to surface for these previous leaders. In most cases nothing has changed fundamentally, yet the prices have declined. All of this points to the importance of taking a long-term, planning-oriented view within portfolios, while keeping some amount of cash available to take advantage of opportunities as they arise. As the legendary investor Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.”

*Some information provided by Raymond James Investment Strategy Committee.

Second Quarter 2014 Market Recap

While the markets managed solid gains over the last three months, investors continue to measure their enthusiasm as the U.S. economy maintains a less-than-robust growth trend heading into the second half of the year. After a hesitant start to 2014, the markets gained momentum as the winter doldrums gave way to slow spring growth. But ever-present concerns over the Fed’s imminent move to wind down its quantitative easing program and eventually raise rates again have kept stock market euphoria at bay. For the quarter, investors saw the S&P 500 rise almost 5%, the Dow rebound from a 1% drop in Q1 to register more than 2% growth, and the Nasdaq gain 5%.

“From the beginning of this year, the main risk to the economic outlook was not that we’d fall into a recession. Rather, it was that we’d end up with more of the same,” says Scott Brown, chief economist at Raymond James. “For the stock market, that may not be bad. The economy continues to recover, but not so much that the Fed removes the punchbowl.”

Our portfolios continued to have a global perspective, with emphasis in the U.S. on large company stocks and internationally in the developed countries, as well as emerging markets where we think both are considerably less-expensive than the U.S.

As far as the bond market is concerned, declining bond yields can be very unsettling. They are shockingly low everywhere in the world. Japan is less than .6%. France is less than 2%. Spain is less than 3%. This is not consistent with accelerating growth or deteriorating credit, the former of which we hope is true and the latter of which we know is true. Thus, it appears that bonds are seriously over-priced and are to be viewed with skepticism in view of the Federal Reserve policy and current interest rates.

Heading into the second half of 2014, earnings and Federal Reserve policy are now at the top of the list of factors expected to affect investors over the next 6 to 12 months. The consensus outlook for U.S. GDP growth remains at about 3% for the second half of 2014, a far cry from the revised -2.9% GDP of the 1st quarter.

We continue to believe that we are possibly in the eighth inning of this bull market and without signs of the potential recession on the horizon (i.e. declining employment, rising job claims, etc.) we believe there is more room to run in this up market.