Smile for the Camera

With approximately half the investment year behind us, we thought it would be a good time to take a financial snapshot of current market conditions.   As any “hip” teen can explain, you need a constant barrage of reflective self-portraits to remind yourself (and who ever else cares to take notice) of just where you have been.  So with that said, here is our market “selfie.”

The major US indices—the S&P, DJIA, and NASDAQ—are all in positive territory.  At the time of this writing the S&P is up 1.8%, the Dow is up 0.5%, and the NASDAQ is up 6.8% (biotech accounts for the largest gain in the NASDAQ).  Fixed income is having a much tougher 2015 with the Barclay’s Aggregate Bond index barely positive at 0.07% for the year.  Many International indices are up double digits on the heels of economic stimulus from the ECB and Japan that began late last year.  Japan’s Nikkei index is up 17.4%, the French CAC and German DAX are up 16.7% and 15.7%, respectively, and the STOXX 600 index (Eurozone) is up 14.6%.  Say “Cheese!”

We are cautiously optimistic for the reminder of 2015.  Here are few reasons why.

Reasons for optimism:  After rallying for nine months, the dollar has stabilized in the second quarter.  This should help improve the outlook for earnings of multinationals and for GDP growth.  Energy prices have stabilized in the $58 - $60 per barrel.  This should help stop the job losses and cuts in capital expenditure in the energy space, which should help GDP.  Housing data continues to show strength.  Personal income has been increasing – although personal spending could be stronger.  Government spending is on the rise, also adding to GDP.  And finally, mergers and acquisitions are on the rise across many sectors—this is typically seen as a proxy of economic confidence. 

There are still a couple of catalysts that could have a negative impact on the markets.  What could derail the optimism?  China’s economy could slow more than expected.  Tensions could rise in the Middle East or between Russian and Ukraine.   Greece could default on its debt to the IMF and exit the Eurozone.   Interest rate hikes in the US could create unexpected market volatility (see “taper tantrum,” May 2013). 

Of the above unknowns, the one that could have the broadest impact might be the Federal Reserve’s interest rate decision in the US.  It is now widely believed that the first US rate increase in nearly a decade will take place in September.  Not everyone is so sure that it is necessary.  In its recent annual review of the US economy, the International Monetary Fund cut its outlook for economic growth in the US and recommended that the Fed put any rate increase on hold until 2016.  Regardless of when rates rise in the US, IMF director Christine Lagarde fears the move could trigger financial market instability and volatility. 

We tend to agree—thus the caution in our optimism.  That is why we have strategies in our model portfolios that reduce exposure to not only equity market volatility, but also bond market volatility.  Smile for the “selfie!” Click!