The S&P 500 experienced small gains for the first three months of the year, increasing +0.44%. If we include dividends, the S&P 500 increased +0.56%. The index tested the 2,000 level on several occasions in January, posted strong gains in February, and declined in March as investors pondered the various Federal Reserve rate increase scenarios. The strength of February is noteworthy—a gain of +5.49% in those trading days alone. This is also a reminder that efforts in market-timing can be very difficult as missing the best trading days greatly impact performance. Volatility picked up during the quarter as news flow from the Fed and the Greek bailout situation oscillated in both a positive and negative fashion.
Consumer discretionary stocks led the way, perhaps bolstered by the drop in oil prices. Further outperforming was the health care sector, led by managed care firms such as UnitedHealth Group. After a stellar 2014, utilities underperformed by a large margin. This may have been due to profit taking as well as portfolio positioning in anticipation of higher interest rates. The drop in oil prices impacted the energy sector as it continued its underperformance. One bright spot was the refining and marketing industry of the energy sector which includes companies such as Tesoro. These companies benefit from a drop in oil prices as they purchase crude oil to refine into other end products such as gasoline, diesel, and jet fuel.
Globally, stock markets outperformed the U.S markets. Most major international regions posted strong gains for the quarter. Notable outperformers were Japanese and Indian stocks. This is in contrast to 2014 performance in which international stocks underperformed their domestic counterparts. Latin America underperformed due to continued currency weakness, low commodity prices and downward revisions to growth forecasts.
Brent crude oil has remained above $50 per barrel for the past two months, as the market reaction of lower production and higher consumption has been quicker. On the demand side, oil consumption in select emerging markets has been growing faster of recent. Further, global oil demand looks to be seasonally stronger in the second half of the year. As such, JP Morgan has raised their Brent crude forecasts to $59 in 2015 and $62 in 2016.
The US dollar gains have slowed when compared to the second half of 2014. Much of the outperformance in 2014 was driven by strong US economic growth as well as Fed rate hike expectations. As the March Fed minutes detailed, the rate hike expectations have diminished as to the timing and the magnitude of the initial and subsequent increases.
As we look towards the next three quarters of 2015, we may continue to experience heightened volatility. At some point, the Fed will begin its rate hike cycle, this is for certain. The uncertainties abound in regards to when the initial rate hike will occur, the magnitude of subsequent rate hikes, and if any inclinations are given at the previously held Federal Reserve meeting. Although a bit fear-inducing, uncertainty alone should not prompt a change in your portfolio objectives. In a 2013 interview regarding the European sovereign debt crisis, Warren Buffet was asked how he invests in such times of uncertainty. He explained that the world is always uncertain. If you own a farm and Italy is having problems, do you sell your farm tomorrow?
Cory Nakamura CFA, CFP®
Chief Investment Strategist and Financial Advisor
CERTIFIED FINANCIAL PLANNER™ professional
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