Q1 2015 Market Update
In the first quarter of 2015, markets remained volatile as the U.S. dollar continued to gain strength, Europe initiated quantitative easing (QE), China continued easing monetary policies to boost domestic growth, and investors tried to guess when the US Fed will begin raising rates. The optimistic outlook for global growth remained fragile, but initial economic reports showed that the U.S. is still on track and Europe’s recovery seems to be gaining traction. Low energy prices and a lack of consumer spending kept inflation below the target rate in Europe and the U.S. Europe has chosen to combat its growth and inflation problems with its own QE plan, while the U.S. Federal Reserve has chosen to treat the data as a reason to keep dovish monetary policies in place.
U.S. stocks posted modest gains in the first quarter, despite hitting new highs in March. The DJIA returned 0.3%, the S&P 500 returned 0.95% and the NASDAQ led the way with returns of 3.5%. U.S. equities were highly volatile during the quarter with the S&P 500 experiencing nine swings of 3.5% or more. The markets were held down by the fear of the effects of a stronger dollar on multinationals’ earnings, uncertainty on where the decimated oil price would stabilize, and speculation on when the Fed will begin raising rates. Additionally, consumers appeared to use savings from low energy prices to increase their savings or pay off debts instead of increasing their discretionary spending. Questions remained about the Fed’s plans after Janet Yellen’s adherence to dovish monetary policies in her March press conference, which the markets took as a sign that a rate hike will likely be delayed past June.
Eurozone equities posted strong gains during the first quarter with the MSCI EMU index returning 5.15%, bolstered by the start of the European Central Bank’s (ECB) QE program which is slated to last until at least September 2016. The Eurozone economies were also stimulated by the depreciation of the euro which helped exporters post strong earnings. Volatility spiked after Greece’s newly elected government denounced austerity measures which renewed concerns that Greece could exit the Eurozone. The MSCI Japan index returned 10.2% in the first quarter after weak economic data sparked expectations of further easing from the Bank of Japan (BOJ). Additionally, Japanese corporations began to focus more on their return on equity, share buybacks, and other financial measure that helped boost investors’ returns. Chinese equities were supported by central bank easing measures and the announcement of a trial program connecting the Shenzhen and Hong Kong stock exchanges. The MSCI EM Index returned 2.2% for the quarter as emerging markets continued to underperform domestic markets. Many emerging markets struggled to cope with currency fluctuations and a lack of demand from developed economies as global growth remained stagnant.
Across the world, twenty-one central banks cut policy rates during the first quarter, which led to further yield curve flattening in the global markets. Nearly all bond types posting positive returns for the quarter. The Barclays US AGG Bond Index returned 1.6% for the quarter as speculation over when the first rate hike will occur took the 10-year U.S. Treasury from 2.17% to 1.92%. Although yields decreased, the Barclays Global Agg Ex U.S. Index returned -4.6% in US dollar terms, highlighting the effects of currency fluctuations.
The HFRI Fund Weighted Composite Index returned 2.4% for the quarter, its strongest outperformance relative to the S&P 500 since Q3 2011. The best performing hedge fund strategy was Global Macro which returned 3.4%, and all four HFRI main indices were positive for the quarter. The Bloomberg Commodity Index was one of the quarter’s worst performers, returning -5.9%. Crude oil continued to fall, and was down 14.9% for the quarter. Oil inventories continued to rise and OPEC reiterated that it will not cut production in the near-term. Although geopolitical tensions and uncertainty regarding global growth remained high, gold came in nearly flat at -0.2% as low global inflation and a strong dollar kept the price in check. The NAREIT Equity REIT Index returned 4% as real estate performed well even though housing data was volatile. Investments in private equity remained strong and dry powder reached a record $1.24 trillion. Venture capital and buyout deals both posted their highest quarterly total deal values since 2007, which bode well for capital currently deployed in the asset class