With all of the headlines during the second quarter of 2015, we are going to spend this market commentary looking backward and discussing how they may impact your portfolio.
The U.S. Market Moves Sideways—and Global Markets Gain Ground
In 2013 and 2014, the U.S. stock market substantially outperformed the rest of the world. In the first half of 2015, our market gave back some of that performance against Europe and emerging markets.
The dollar continued to show strength in the first half of 2015. This led to lower foreign returns when translated into U.S. dollars, though the rise in the dollar slowed compared to the dramatic increase in the second half of last year.
Here’s what happened in the first half of 2015 in the U.S., in Europe and in China:
The outperformance in foreign markets is not a reflection of lack of strength in the U.S. economy; after a slump due to severe winter weather, the U.S. still leads the developed world in its economic growth. There are continued positive signs in most traditional indicators of economic activity such as housing, auto and retail sales, employment, and capital goods orders by companies.
Outside of the energy sector, which has been hit hard by the drop in oil prices, 2015 corporate profits are expected to show solid growth, with profit projections upgraded from earlier this year. The one cloud on the horizon is the impact of the stronger dollar, as the value of profits in overseas markets drops and some U.S. manufacturers find themselves struggling to keep prices competitive.
Going into the second quarter, strong leadership by the European Central Bank improved the outlook for Europe’s economies. As well, European multinationals have seen their competitiveness increase due to the fall in value of the euro. Consumers have benefited from the drop in oil prices since the middle of 2014, with the prospect of stronger consumer spending as a result.
Earlier this spring, there was a general sense that accommodation would be reached with the far-left anti-austerity government elected in Greece. The latter part of June saw a confrontation between Greek’s leaders and its European creditors, culminating with a referendum on July 5 in which voters rejected austerity measures associated with a bailout proposal. There now appears to be the real possibility of a “Grexit” from the European Union, which would mean Greece abandoning the euro as its currency.
We expect European stocks and bonds will see volatility over the period ahead. However Greece’s economy is about the size of Alabama’s and only makes up 1% of Europe’s economy. Thus the Greek crisis should not have lasting effects as long as instability does not spread to larger economies such as Italy and Spain.
While Greece has received lots of attention, the true wild card when it comes to global growth is China. After three decades of 10%-plus annual growth (something never seen for an economy its size), the growth of China’s economy is slowing to mid-single digits. China’s uncertain growth prospects are driven by substantial overcapacity in its factories, the prospect of a sharp drop in real estate prices, and what appears to be a full-fledged bubble in stock valuations. Of note, stock prices doubled in the seven months to mid- June, much of that driven by individuals borrowing to participate in a speculative frenzy, before dropping by 25% in the next three weeks.
With the international uncertainty which we face today it is important to remember the principals we believe are essential to investing.
Staying in Balance
A lesson from the world’s wealthiest families and most sophisticated investors is the importance of not just starting with a diversified portfolio but maintaining that diversification as markets rise and fall. As different investments grow at different rates, a portfolio’s overall allocation will change unless the portfolio is rebalanced, which means reset back to its original allocation. For example, if you started with a portfolio that is 60% equities and 40% bonds and don’t rebalance it, because equities have been strong over the last several years that portfolio could now be a 75% equity and 25% bond allocation. The investor can end up with more risk inside his or her portfolio than was intended.
One of the best ways to control portfolio risk is through disciplined diversification. Diversification doesn’t just mean holding stocks and bonds; it also entails ensuring a broad exposure across industry sectors. Investors who were overexposed to the energy sector saw last year’s collapse in oil prices from over $100 to under $50 hit their portfolios particularly hard. On the topic of global diversification, the drop in oil prices, if sustained for the period ahead, is particular positive news for large oil importers in Europe and Asia.
We design portfolios with the view of providing clients with the best possible returns on a risk-adjusted basis when looking across a full-market cycle. To do that, we look at the broadest possible range of alternatives, both within the U.S. and around the world.
Ultimately, every client’s needs are unique, and we work hard to select the portfolio that is right for your personal risk tolerance and situation. If we haven’t talked recently, we would welcome the opportunity to sit down to update your circumstances and to ensure that your portfolio is designed to provide the returns to achieve your long-term goals with no more risk than is necessary.
I hope that you have found this review helpful. Please don’t hesitate to give me a call or send me an email if you have any questions. And as always, thank you for the opportunity to serve as your financial advisor.
The views and opinions expressed are of White Horse Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. White Horse Advisors is an investment advisor firm located in Atlanta, GA.