The first quarter of 2015 saw a few key factors dominate the equity and fixed income markets. Earnings began to show signs of weakness as oil prices remained lower and the US Dollar continued to strengthen. Low oil has hurt companies connected to the energy sector while the strong dollar has hurt US companies that conduct business (sell products or services) overseas. However, what has hurt company earnings has been good for the US consumer. Low oil prices have kept prices low at the pump while a strong Dollar has given Americans buying power they haven’t seen in decades.
While market observers have paid close attention to oil price and the Dollar, the central focus has actually been the Federal Reserve. Speculation has been made on when and how dramatically the Fed will raise interest rates. This action is usually taken to combat an economy that is heating up too much or too quickly and to offset any inflation as a result of an improving economy. Many have suggested that the bull market that has run for over six years has been largely supported by historically low rates. As a result, in every recent instance where investors speculated that rates would rise, the stock market declined sharply. It’s a classic example of emotion dictating trading decisions instead of fundamentals. Another way to think of the irrational behavior of the market is this: the stock market is throwing a fit because the Federal Reserve thinks the economy has improved to a sufficient level as to raise rates.
Looking forward to the rest of the year, we feel that the current bull market still has room to run. Headwinds are starting to pick up and volatility will likely continue, but our long term outlook on equity performance is still optimistic. The Fed will likely raise rates this year although we maintain that it will be later in the year and more gradual than the market has speculated thus far.
From a diversification standpoint, we have been encouraged by the strong performance of international stocks since the beginning of the year. By most broad market measures, international stocks have outpaced US large company stocks by four times year to date. We remain committed to a certain level of global diversification as valuations of overseas stocks remain more attractive the US stocks.
Lastly, we encourage you to have a conversation with us if you have any questions or thoughts on your strategy and financial plan. As always, our primary goal is to serve as your advocate in your progress towards financial success.