If you missed our market overview of Fourth Quarter 2014, click here.
The S&P 500 notched its ninth consecutive quarterly gain in the first quarter of 2015, rising 1.0%. Even stronger returns were achieved overseas and in smaller cap stocks, in contrast to what we saw in 2014. While the U.S. Federal Reserve appeared to be edging closer to raising short-term interest rates, domestic economic indicators remained mixed, and the Fed lowered near-term growth and inflation expectations. Corporate profits felt the effects of a stronger dollar and its impact on companies that do business abroad.
Oil prices continued to decline, as U.S. crude fell 10.6% and Brent Crude fell 3.9%. The S&P GSCI™ (commodity index) lost 8.2%.
In March, the European Central Bank (ECB) initiated its bond-buying program to stimulate growth and inflation, and European bond yields continued their downward trajectory. Yields on 10-year German and French bonds stand at .18% and .48%, respectively. In the U.S., the 10-year Treasury yield fell from 2.17% at the beginning of the year to 1.93% by March 31. The Barclays Aggregate bond benchmark rose 1.6%. The U.S. dollar remained strong in the wake of European and Japanese easing, gaining 6% against a basket of currencies. The euro declined 11% against the dollar.
For the second quarter in a row, small cap outperformed large cap; the Russell 2000 Index of small-cap stocks rose 4.3%. The largest stocks turned in a negative result of -.5% (Russell Top 50). From a style perspective, growth stocks outpaced value stocks by a good margin in the U.S. and overseas. The negative value premium was largest in the U.S. Within the S&P 500, Health Care (+6.6%) and Consumer Discretionary (+4.8%) stocks led the way, while Utilities (-5.2%) and Energy (-2.9%) stocks lagged.
After trailing their U.S. counterparts for the past two years, international stocks bounced back in the first quarter. Developed-country stocks advanced 4.9% in US$ terms and were even stronger on a local currency basis (+10.9%). Many countries saw new highs during the first quarter. Germany soared 22.0% locally, which translated into an 8.28% result for U.S. investors given the euro’s weakness. Japan was up 10.2% (US$ and local).
Emerging markets trailed developed markets but were ahead of the U.S. with a +2.3% return (US$). Russia saw two interest rate cuts during the quarter and recovered 18.6% (US$) after last quarter’s 32.8% (US$) decline. Stocks in Greece fell 29.3% (US$), as the nation’s new government sought an extension on debt payments.
Returns on unhedged international bonds suffered again this quarter from currency weakness overseas. Developed-country bonds (Barclays Global Aggregate ex-U.S. Unhedged) lost 4.6%, and emerging markets (JPM GBI-EM Gl Div UH) fell 4.0%.
High-yield bonds in the U.S. produced a better result, rising 2.7%.
Following a period in which U.S. large-cap stocks and bonds were dominant within the investment landscape, the first quarter again showed the value of broad diversification in a portfolio. Small-cap and international (developed and emerging) stocks outperformed U.S. large cap; high-yield bonds outperformed investment grade. This may not be the case every quarter any more than U.S. outperformance will be. But a diversified portfolio that includes an appropriate mix of asset classes across the globe allows investors to capture those returns, wherever they occur.