Stocks managed small gains in the second quarter of 2015. The S&P 500 was up slightly, leaving it up about 1.2% so far this year. Bond yields also rose during the second quarter as investors braced for upcoming rate hikes from the Federal Reserve. Despite the underperformance of international equities during the second quarter, they remain ahead U.S. equities on a year–to-date basis.
High relative strength equities had much choppier returns during the quarter than the broad market. After their stellar performance during the first three months of the year we expected there might be some giveback this quarter. Right out of the gate, high momentum equities began underperforming the broad market, and reached a relative low during the last part of April and beginning of May. But the second half of the quarter was very good for our strategies. We made up a lot of the performance lag during the last six weeks of the quarter. High momentum stocks generally finished slightly behind their benchmarks for the quarter, but that still leaves them well ahead of the broad market for the year. We were pleased to see the rebound in the types of stocks we buy given the exceptionally strong performance to begin the year.
The circus in Greece dominated the headlines at the end of the second quarter. There is really no question whether Greece will default on their debts to their creditors – they are going to. The big question seems to be whether Greece will accept austerity measures that will allow them to borrow even more money, and if not, whether they will abandon the Euro as their currency and return to the Drachma. To put things in perspective, Greece has spent a good portion of its modern history in some sort of financial crisis so this is really nothing new. What is new is that Greece doesn’t have its own currency any more so that can not be used as a tool to inflate their way out of debt. The political and economic ramifications of any scenario in Greece are, quite frankly, impossible to determine. There is no shortage of opinions being expressed in the media about what should happen, but nobody knows for sure. We do know, however, that this will play out in the price action of various securities and asset classes around the globe. It appears U.S. investors have been largely shrugging off the news so far. If that changes, new trends will emerge and our process is designed to shift the portfolios to those emerging trends.
The economic data received during the second quarter confirmed that the economy is slowing down. Gross Domestic Product decreased 0.2% during the first three months of the year. There were some mixed data points that were released later in the quarter so it is really too early to tell if the slowdown in Q1 was the beginning of something bigger or just a small dip within a larger trend. The economic data did seem to have an effect on Federal Reserve policy. It appeared as if the Fed was looking to raise rates over the summer (as early as June), but the slowing economy seems to have delayed those plans. The Fed minutes indicated they would like to begin rate increases some time this year, but the pace of those increases might not be as rapid as people thought. The Fed has spent an enormous amount of time and energy (and money!) helping the economy limp along, and their statement confirmed they are not about to abandon that policy any time soon.
Overall, we were pleased that our strategies held their own during the quarter after such a strong start to the year. We believe this leaves us well positioned to capitalize on the second half of the year. There are definitely some news headlines that will get a lot of attention and add to the volatility over the summer. However, it is important to remember there have been numerous “problems” that have cropped up during the entire bull run over the last 5 plus years, and nothing has been able to derail this bull market yet.
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