Is it possible that 2015 is half gone already? It seems we toasted the New Year mere moments ago; now we have time warped directly to summer vacation. When you pack up for that family road trip, throw the Summit Perspective in with your pleasure reading as we offer a quick summary of the top market stories of the last six months. It has been a relatively quiet first two quarters in the markets, much to the disappointment of the financial media, who make their living making mountains out of molehills. Here are a few things you may have heard about in passing as you were busy living life this year:
Diversification Fights Back
Unlike 2014, where the US market roared and most others were flat or negative, this year is shaping up as the year of diversification. While US Markets are posting modest gains (S&P 500 is flat at this writing)(1), international developed markets are posting solid gains. As a result, portfolios with exposure across multiple asset classes are outperforming the U.S. market averages at present. Readers of this newsletter need not be reminded that this is neither a prediction of future nor evidence that this phenomenon should continue. It’s merely interesting to note in light of last year’s US market superiority.
Interest Rates – Did They Turn?
After falling further in the first two months of the year, it seems that interest rates may be on the rise, despite the Federal Reserve’s reluctance to raise short term rates. Using the 10 Year U.S Treasury Note as a measure, interest rates have risen from a low of 1.67% in early February, to over 2.4% at this writing. While these are still historically low rates, it is noteworthy that the rise represents a 40% increase in rates in a short time.
Since increasing interest rates have a negative impact on bond prices, fixed income investments have had difficulty posting positive returns in the first half of the year. This is a phenomenon that we have long anticipated – not because we had a clue about the timing – but merely because the only direction for rates to go was up when they were virtually at zero. It remains to be seen if rates will continue their rise, or creep along as they have over the last few years. Much attention will be paid to the Federal Reserve in the months ahead as pundits debate whether the Fed will raise short term interest rates at all in 2015, raise them once, or even twice before year-end.
Economic Data is Solid
Oil prices (and therefore gasoline) are still relatively low after last year’s selloff in the commodities space. This puts more money in the pocket of consumers and recent data (2) suggests they are starting to spend it a bit. Job creation is continuing at an appropriate pace and we are seeing signs of wage pressure, which signals workers earning more in a tighter job market. For businesses in hot markets like the Bay Area, anecdotal evidence from our client base suggests that the competition for talent is in full swing and hiring is very difficult.
It seems that Greece and their ongoing financial struggles dominate the headlines every couple months or so. Each time, the European Union and the International Monetary Fund continue forward after much hand wringing and sabre rattling. Short term traders may enjoy the volatility created by the rumors that a Greek default will somehow have major impacts on the markets, but the long term investor should probably just ignore the noise. Greece’s economy doesn’t even approach the size of Silicon Valley, much less the total world markets. While headlines from fiscally challenged governments may be part of our existence for a while, we encourage investors to stay the course and let these issues play themselves out. In the last few years there was a debt crisis in the U.S., Cyprus was in trouble, Greece has had several rounds of crisis and Spain and Ireland were all in a fiscal mess. While these issues haven’t been fully resolved, the markets have worked out their reaction and moved on.
If you have questions about these items or any other market news that might be on your mind, we invite you to give us a call or stop by for a chat. We hope you enjoy the Summer edition of the Summit Perspective, and your travels lead to some great memories to share when we see you.