Q2 2015 Market Commentary
The second quarter of 2015 echoed many of the questions and concerns of the first. Global markets were volatile as investors continued to wait for the U.S. Federal Reserve to set a date for its first interest rate hike and contemplated the lack of economic growth in the consumer space. Overseas, the European Central Bank (ECB) pushed its own QE plans swiftly ahead while dealing with Greece further entrenching its incendiary role in Europe’s fragile recovery. Emerging market countries dealt with suppressed commodity prices and the aftermath of recent elections. In the East, Japan continued full-speed ahead with its QE and currency devaluation measures, and Chinese markets soared to dramatic highs only to fall into bear market territory late in the quarter.
U.S. stocks experienced a tepid slow down during the second quarter. The DJIA returned -0.29%, the S&P 500 returned 0.28%, and the NASDAQ led the way with returns of 2.03%. U.S. equities remained volatile during the quarter with the S&P experiencing nine swings of +/- 1% or more, however, trading was kept in a narrow range. Small and mid-cap issues continued to lead domestic market returns possibly due to a recent increase in consumer spending and less exposure to the effects of a stronger U.S. dollar and other geopolitical concerns. Overall, returns were held down by global macro issues: fears that Greece might default on its debts, concerns over the outlook for oil prices, and speculation on when the Fed would raise interest rates. Q2 economic reports indicated that consumer spending was significantly up during the quarter, and home purchasing data showed that momentum appears to be building in the real estate market. This news signals a potential boost to the broader economic outlook of the United States as the economy looks to rebound in the second half of the year.
After posting strong performances in Q1, a lack of traction resulting from inconsistent economic data reports and the looming debt crisis in Greece pushed European equities down in Q2. Although many countries saw an increase in consumer spending and the return of inflation to the region, the MSCI EU lost -1.01% and the MSCI EMU lost -2.78%. European markets have performed well this year, but the increase in volatility brought on by a major bond sell-off in the region and the issues in Greece have the potential to create a debilitating contagion effect in the Eurozone. Japan continued to post strong market returns with the MSCI Japan returning 2.93%, bolstered by massive quantitative easing measures, a continued emphasis on increasing returns to stockholders, and renewed inflows of foreign capital into the stock market. Fueled by an unprecedented increase in first time domestic investors, excessive margin trading, and multiple interest rate cuts, Chinese markets continued to skyrocket through much of the quarter but began entering bear market territory in the last few days of June. The MSCI EM Index returned -0.24% for the quarter. Emerging markets showed increasing divergence in returns as shifting macroeconomic trends affected various monetary pressure points and EM governments continued to take a more internalized approach to currency and policy management.
Across the world, only one central bank (Brazil) raised policy rates during the second quarter while 17 central banks cut interest rates. Fixed income investments showed their susceptibility to a mix of global political turbulence, macroeconomic events, and diverging interest rate policies. All major bond sectors posted negative returns for the quarter as longer dated rates began to move upwards and Europe experienced a massive sell-off after reports showed that inflation had returned to the region. The Barclays US AGG Bond Index returned -1.68% losing value as the 10-year U.S. Treasury rate increased from 2.19% to 2.35%. The Markit iBoxx Liquid IG Index, which indexes investment grade corporate issues, posted a return of -4.83%, the Barclays Global Agg Ex U.S. Index returned -0.83% in US dollar terms, and the S&P National AMT-Free Muni Bond Index returned -1.02%.
The HFRI Fund Weighted Composite Index returned just 0.01% for the quarter but has continued to outperform the S&P 500 year to date. This is the first time that hedge funds have outpaced the broader market in the last 5 years. Equity hedged strategies were the top performers, with the Credit Suisse L/S Equity Hedge Index returning 2.1%. Commodities were one of the strongest performing sectors during Q2. The S&P GSCI Index posted returns of 8.73%, recovering nearly all of its first quarter losses. Crude oil rebounded to start the second quarter but began to decline and stuck within a tight trading range as prices seemed to stabilize somewhat ahead of another deadline for Iranian discussions and fears of a decrease in demand stemming from the Greek crisis. Geopolitical and global economic worries were not enough to trigger demand for gold which has been historically been viewed as a safe haven investment in times of crises. Gold prices, as measured by the LBMA Gold Price, decreased by -1.35% during the quarter, most likely held in check by the lack of global inflation and the sustained strength of the U.S. dollar. Real estate was one of the worst performing sectors in Q2. The NAREIT Equity REIT Index lost -9.06% for the quarter. Real estate investments, along with other rate sensitive asset classes, saw increased pricing volatility during the quarter as global bond yields spiked upwards.