First Quarter 2015 Market Review
The first quarter turned out to be one of the more volatile periods for the stock market we have seen since early 2012. With the dollar strong and inclement weather a deterrent, investors first became concerned that economic growth was moving at a dangerously slow rate. But then job growth picked up nicely, oil prices seemed to stabilize and investors began to regain confidence during February. However, investors became concerned again, this time worried that the strong job gains would soon convince the Federal Reserve to raise interest rates.
The almost 0% short term interest rates that the Fed put into effect a few years ago have been the primary drivers of the economic recovery and especially important to the very good stock market we have experienced over the past 5 years. As a result, investors have been highly sensitive to any potential upward adjustment in interest rates for quite some time now.
As a result of these on again, off again concerns, the S&P 500 stock market index rose just 0.95% during the first quarter despite no change in short term interest rates and good, albeit sub-par economic growth. On the other hand, longer term rates did decline for the period as quantitative easing programs accelerated in Japan and began in Europe with some 10-year country government bond rates going to zero or less during the period.
This persuaded many global investors to convert their currencies into dollars and use these dollars to buy U.S. Government Bonds, thereby pushing prices higher and in turn, lowering interest rates. As a result, the Barclays U.S. Intermediate Government Credit bond index increased 1.45% for the quarter.
Shifting gears back to the stock market, there was a relatively high degree of performance dispersion among the economic sectors during the period. Benefitting from Government subsidies, Healthcare stocks performed the best (+6.5%) while the fear of rising interest rates hurt the Utility sector as stock prices in that category declined the most at -5.2%.
Finally, there was also a very clear performance distinction between growth and value stocks and between small, medium and large capitalization stocks. Growth stocks outperformed in general and small capitalization stocks placed first overall.
The first quarter was a good period for active portfolio managers (i.e. stock pickers) given that the market was less correlated during the period than it has been in recent history. According to a Barron’s article, “the 8,212 diversified equity funds tracked by Lipper…returned 2.48% for the January –March period, compared with just 0.8% for S&P 500 Index funds”. As noted earlier, the S&P 500 Index itself increased 0.95%.
The outlook for the stock market for the remainder of the year will continue to be importantly dependant on what happens to interest rates. Overall, the global economy is still showing more signs of stagnation than not. On the margin, the Eurozone’s economy appears to be improving, though barely. U.S. economic growth has slowed this year and it’s not for certain that it was due primarily to bad weather. The Japanese economy looks to be on its way to its third lost decade and China is slowing as are other major emerging markets.
This all suggests deflation is more likely the issue and raising rates would only slow business conditions further. We are also pleased to see that corporate earnings, excluding energy stocks, should increase about 8% this year, oil prices appear to be near a bottom, and the changing fundamentals of the Energy Industry promise to positively affect the economy and stock market long term.