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1st Quarter 2015 – Commentary
Kirsty Peev CFP ®, Portfolio Manager
April 8, 2015
Market and Portfolio Performance:
Summary:
· Developed International equities were the strongest performers for the quarter, with emerging markets
equities also delivering strong returns. Large cap U.S. stocks delivered relatively flat returns and trailed other
equity asset classes. U.S. smaller and mid-cap stocks outperformed their domestic large-cap counterparts.
· Income-producing real estate continues to be a slow-and-steady performer for your portfolio, delivering strong
returns for the quarter.
· Bond investors received healthy returns across the board, with investors favoring longer-term and riskier
assets within the category.
Equities:
· U.S. equities had a very volatile quarter. January was sharply negative, February delivered high positive returns,
and March brought the return of negativity to stock markets. This wild ride left U.S. stocks mostly flat for the first
quarter. The S&P500 closed the quarter up 1.00% and the DJIA was up just 0.3%. Both of these indices represent
large-cap U.S. stocks – which led the way in fine fashion during 2014. The start to 2015 saw other equity asset
classes lead the way. Domestically, medium and smaller sized companies out-performed, delivering strong returns.
o Investors continued to obsessively follow monetary policy from the Federal Reserve’s meetings –
anticipating with anxiety the first signs of any interest rate increase. Each hint of a comment or quote
from the Fed caused U.S. stock markets to move wildly. Large swings were seen in both positive and
negative directions.
o The strong dollar also continued to impact markets. Many U.S. companies have strong international
presence, so changes to the value of the dollar relative to other currencies can affect their earnings since
foreign earnings have to be translated into stronger U.S. dollars. A higher dollar contributes to further
slowing of U.S. exports.
·
International stocks, which were out of favor during 2014, delivered excellent returns for the first quarter with the
MSCI EAFE (representing developed stocks) up 5.00%! Their emerging market counterparts also delivered strong
returns.
o The European Central Bank rolled out its Quantitative Easing Program during the first quarter –
announcing a bond-buying program of significant magnitude. The expectation for this program is that
there will be around $1 trillion in bond purchases – this program initiation resulted in a sharply falling
Euro, and strong returns from European stock markets which cheered the program.
·
We have continued to witness less correlation among global markets, which we saw starting in 2014. During 2014,
U.S. investors saw more muted returns because of the inclusion of international stocks – the exact opposite was
witnessed during the first quarter of 2015 where international stocks helped to provide stronger returns. Market
periods like these demonstrate the continuing need for diversification. It is impossible to accurately and consistently
predict which asset class will lead the way for any period of time. Thus allocations to a variety of classes which
move in non-correlated manners help provide for strong long-term risk-adjusted returns. It is actually preferable to
have less correlated markets as a properly diversified portfolio can perform well during these climates.
Virginia Office
20365 Exchange Street, Suite 200
Ashburn, VA 20147
Maryland Office
Tel 240-268-1000 | Fax 240-449-8818 | Toll Free 877-268-1200
www.halpernfinancial.com
401 N. Washington Street, Suite 330
Rockville, MD 20850
Alternatives:
· During the first quarter, real estate returns were influenced by headlines, with some investors questioning whether
real estate can continue to deliver such strong returns. Increases in interest rates will naturally cause mortgage
rates to rise and there is a concern that this will hinder home prices. However, investors tempered this fear with the
knowledge that real estate benefits from an improving economy. Rates will generally only increase if economic
figures are sound.
· We favor exposure to Real Estate through income-producing REITs. This includes both stock and bonds issued by
real estate companies. This is a more conservative approach than a more traditional REIT holding and can help to
deliver less volatile returns.
Bonds:
· Most bond asset classes delivered steady returns during the first quarter. There was a small period of negativity
during February as investors mulled the upcoming Fed meetings and the guidance on potential rate increases, but
overall returns were healthy.
·
Corporate bonds delivered the strongest results for the quarter. Specifically within corporate bonds, the more risky
bonds provided the best returns with high-yield bonds, and long-term corporate bonds leading the way.
·
Municipal bonds continued to deliver steady positive returns. They too experienced a slight dip during late February,
tied to anticipation of rate changes, but this was just a minor bump in the road and muni bonds of all classes
delivered positive returns for the quarter.
·
Bond investors have continued to add to intermediate-and longer-term bonds, with both of these asset classes
outperforming shorter term issuers. The fear of rising interest rates has kept some investors from including any
intermediate or longer-term bonds in their portfolio for some time now. Investors shied away from these bonds as
they attempted to predict when a Fed rate move would be announced. However, these intermediate and longer
duration bonds have been the strongest performers among bonds for both 2014, and the start of 2015. We have
mentioned many times for both stock markets and bond markets that attempting to time the markets is not the
appropriate strategy for investment success.
Expectations and Perceptions for the future:
Equities:
· All eyes are on the Federal Reserve for now, as investors wait for more clarity on the plan for raising rates. At this
point it does not appear that the actual announcement of the first rate increase will be a surprise to markets, so the
announcement itself of an initial increase is unlikely to cause much sustained movement. However, speculation up
to that point, coupled with concern over the speed that rates are to be increased will likely continue to cause
heightened volatility in equities.
·
The target federal funds rate has been near zero since late 2008 and we have not been in a tightening monetary
environment since 2006. Since that time we have seen multiple actions from the Fed to keep easy money including
a massive, unprecedented Quantitative Easing program in the U.S. and other monetary policy actions globally.
Each of these easing policies that were put in place (and continue to be in place by the European Central Bank)
have consequences, and policy makers around the world need to tread a careful path as they work to unwind these.
We do believe the Fed will be successful in beginning to undo the easy money policies that have been in place for
so long. However, this will not be without some short-term negative volatility within global stock and bond markets.
Alternatives:
· Historically, REITs have reacted negatively during interest rate hikes. However, they have also then adjusted and
performed well during a longer-term cycle of rising interest rates. A rising interest rate environment means that the
economy is improving – for real estate this means higher growth rates for REITs through increasing rents and higher
occupancy rates. We anticipate some price pressure around rate increases, but we believe these increases will be
comfortably absorbed by the income-focused side of real estate that we favor.
Virginia Office
20365 Exchange Street, Suite 200
Ashburn, VA 20147
Maryland Office
Tel 240-268-1000 | Fax 240-449-8818 | Toll Free 877-268-1200
www.halpernfinancial.com
401 N. Washington Street, Suite 330
Rockville, MD 20850
Bonds:
· We do not believe that yields on U.S. bonds will increase significantly in the near term. A stronger U.S. dollar,
continuously falling commodity prices, and low yields on bonds globally will likely hold down yields on bonds in the
U.S.
·
The potential for rising interest rates has been at the forefront of bond investors’ minds for a very long time. We
believe that a great deal of this concern is already priced into bond markets – so we do not expect the type of
significant dips in bond markets that we saw during the ‘taper tantrum’.
·
Due to the nature of the fixed income holdings we include in your portfolio, we look forward to higher interest rates –
this means your bond portfolio holdings will be working harder for you and providing higher levels of income. There
may be some short-term pain as we get to this point, but in the long-run this is a greater benefit to your portfolio.
Higher volatility is likely within all bond asset classes. Remember you own large baskets of bonds within mutual
funds and exchange traded funds which continually reshuffle to adjust for changing market climates.
Virginia Office
20365 Exchange Street, Suite 200
Ashburn, VA 20147
Maryland Office
Tel 240-268-1000 | Fax 240-449-8818 | Toll Free 877-268-1200
www.halpernfinancial.com
401 N. Washington Street, Suite 330
Rockville, MD 20850