The heightened volatility that began in the fourth quarter of last year continued in the first quarter of 2015. By the end of January, the broad U.S. stock market was down about 3% as investors were warned once again that the Federal Reserve intended to raise interest rates soon. Stocks recovered these early losses in February following published economic reports suggesting that the pace of growth of the U.S. economy was slowing. At the same time the economy was appearing to slow, U.S. corporate executives expressed fears about the difficulty of competing in a world with a much stronger U.S. dollar. As often happens, disappointing news for the economy was good news for stocks as investors concluded that the weaker economy would lead the Fed to move more slowly in raising interest rates. By the end of the quarter, the S&P 500, which measures the performance of the largest publicly traded stocks in the U.S. , was up about 1%.
2014 was a relatively difficult year for smaller companies in the U.S. but the first quarter of 2015 saw the best known small company stock index, the Russell 2000, rise close to 4%. Small companies are less dependent upon foreign markets than are larger companies so the stronger dollar has less of an impact on small company earnings.
International equities outperformed U.S. stocks during the quarter as quantitative easing was implemented in the Eurozone and a low but stable yen increased demand for Japanese exports. Developed overseas markets returned roughly 3.5% in the aggregate. Japan, which has the largest market capitalization outside of the U.S., returned more than 10%. The main Japanese stock market index, the Nikkei 225, has generated strong returns recently but is still only about half that of late 1989. Think about that for a minute: even after having doubled in value over the past couple of years, the world’s second largest stock market has returned roughly -50% over a period of more than 25 years.
Volatility in the bond market was also high in the first quarter. The year began with the 10-year Treasury yielding 2.2% and yet by the end of the quarter it was lower still, at 1.9%. The Barclays Aggregate Bond Index, the most closely followed bond benchmark, was up 1.6% during the quarter. Foreign bond interest rates also fell but returns were offset by depreciating underlying currencies. Hedged foreign bonds rose by more than 2%. Unhedged foreign bonds fell by similar amounts.
The Bloomberg Commodity Index was down close to 6% as the price of oil continued to decline in the first quarter. Gold was roughly flat.
One encounters again stories regarding the finances of Greece. With baseball season back in full swing, we acknowledge that it takes considerable self-discipline to re-engage on this topic. For those inclined to read as little about Greece as possible but still be equipped with the basics, we offer here a quick take on Greece’s recent economic history and why the situation there is regarded as important for all of Europe.
It seems like yesterday but it was in October 2009 that the government of Greece announced that it had been cooking its books for a long time. Like other countries, Greece was required to have a deficit of no more than 3% of gross domestic product (GDP) in order to be admitted to the European Monetary Union (EMU) and since 2001 Greece had proclaimed itself to be in good standing. When the government announced that the deficit would be 12% of GDP that year (the actual deficit was closer to 15%), panic ensued.
As interest rates rose (what interest rate would you have required if you were lending money to Greece?), the country could no longer pay its debts. It was forced to borrow hundreds of billions of euros from the European Central Bank and the International Monetary Fund. In return for these funds, Greece had to promise to implement a series of severe austerity measures. Since one in five Greeks worked in the bloated public sector and since there was (and is) no effective mechanism for tax collection, achieving fiscal balance amidst a terrible global recession proved all but impossible.
Picking up the story six years later, Greece is only now emerging from recession. Its economy is a full quarter smaller than it was at the onset of the crisis. By comparison, the U.S. economy shrunk by roughly one-third in real terms during the Great Depression of the 1930s. The situation remains dire. More than 40% of Greeks have incomes that fall below the official poverty line (about $9,000 per person per year). The unemployment rate is 26%. Even the suicide rate is distressingly high.
Facing many more years of painful austerity, in January of this year, Greek voters elected a new government that pledged an end to budget cuts. Instead, Greece would ask its creditors both to extend the term of its loans and to accept “haircuts”, a reduction in the value of outstanding debt. To date, though, the creditors aren’t budging. They maintain that Greece has not yet done enough to push through structural reforms.
With Greece set to run out of money in the next few months, this can cannot be kicked too much further down the road. Unlike the U.S., Greece does not control a printing press it can use to create new money and pay its debts. The fear is that Greece might choose to stiff its creditors, exit the EMU (hence the term “Grexit”) and go back to using the drachma. The economic consequences of such an action are impossible to anticipate for all concerned parties, and yet it is the potential political fallout that causes the most anxiety. A Greek exit from the EMU would establish a new precedent. If this occurred without too much hardship for Greece’s citizens, residents of other highly indebted countries such as Spain, Portugal, and Italy could be tempted to follow Greece’s lead. The grand project of European unification might seriously unravel.
Written by Jeff D. Lancaster, CFP®, Principal; [email protected]
|Index||Market||Year-to-Date as of 3/31/15|
|Standard & Poor’s 500||Large Co. U.S. Stocks||0.95%|
|Russell 1000 Value||Large Co. Value U.S. Stocks||-0.72%|
|Russell 2000||Small Co. U.S. Stocks||4.32%|
|Russell 2000 Value||Small Co. Value U.S. Stocks||1.98%|
|FTSE NAREIT Equity||Real Estate Investment Trusts||3.98%|
|NASDAQ 100||Technology Stocks||2.30%|
|MSCI EAFE1||Foreign Stocks||4.88%|
|Barclays Aggregate||U.S. Dollar Bonds||1.61%|
|Barclays Municipal||Municipal Bonds||1.01%|
|BofA Merrill Global||Global Bonds||‐0.98%|
TheComexspotrateforgoldwasvirtuallyflatinthe1stquarterof2015,declining0.07%to close at $1,183.10 an ounce. Expectations for next quarter are positive with indications that the Federal Reserve will hold off on hiking interest rates until later in the year. A delay in raising interest rates would be seen as bullish for gold, as it decreases the relative cost of holding on to the metal.
U.S. crude oil prices continued on their downward trend in the 1st quarter of 2015, dropping 10.6% to close at $47.60. As the framework for Iran’s nuclear program is formed, it is anticipated that Iran’s oil supply could potentially make its way into the market after sanctions against them have been eased, thus increasing the supply of oil.
Key economic indicators compiled by Barbara A. Ziontz, CFP®, Portfolio Manager; [email protected]
The Wall Street Journal; U.S. Dept. of Commerce – Bureau of Economic Analysis; U.S. Dept. of Labor; Bloomberg.com; Live.Lehman.com; MSCI.com; REIT.com; NYTimes.com; StandardandPoors.com; Vanguard.com
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