Investment Review for First Quarter 2015

Global stocks increased 2.3% during the first quarter, but returns differed significantly based on company size and geography. Within the U.S., mid-sized company stocks performed best (up 5.3%), while large companies increased a modest 1%. Abroad, both foreign developed and emerging market country stocks recovered the bulk of the 2014 losses by increasing 4.9% and 2.2% respectively.

Major asset class returns.

Deceleration of growth.

Fourth quarter economic growth was revised down from the initial estimate of 2.6% to the final estimate of 2.2%. While decent in absolute terms, it is well below the robust levels experienced during the second and third quarters of 2014.

Meanwhile, economic activity for the first quarter of 2015 has decelerated. Both business and consumer spending have fallen. It is likely that severe weather conditions in the Northeast as well as labor disputes involving West Coast dockworkers contributed to the slowdown.

The urge to merge.

With modest prospects for organic revenue growth (business expansion by increased output, customer base expansion, or new product development), many companies are looking toward acquisitions for growth. Strong corporate balance sheets, low interest rates, and a strong U.S. dollar may prove to be the perfect combination for increased merger and acquisition activity. Globally, approximately $850 billion of deals were announced in the first quarter alone.

Changing employment landscape.

Over 12 million jobs have been added since the U.S. labor market turned the corner in early 2010, but the domestic workforce is much different than the pre-recession environment. Service sector jobs in education, health, leisure, and hospitality have risen by nearly 4.5 million, while goods-producing industries such as construction and manufacturing have fallen by nearly 3 million.

European Central Bank asset purchase program.

In a widely anticipated move, the ECB announced it would expand its asset purchase program to include euro area government bonds. Under this expanded program, the combined monthly purchases of public and private sector bonds will amount to €60 billion. The program, which began in March, is intended to be carried out until at least September 2016.

Following the announcement to expand the ECB’s asset purchase program, euro area government bond yields have continued to trend lower, declining to all-time lows in most jurisdictions, with many bond yields now in negative territory. For U.S. investors, the negative yields in Europe continue to add downward pressure on bond yields at home.

The dollar strengthens.

The U.S. dollar has strengthened over 30% since mid-2011 and is now at levels not seen since October of 2003. While still well below historic peaks, our economy is much less dominant in the global marketplace than in the past. Goods and services produced in the U.S. account for just over 16% of global output today, down from nearly 23% in the 1980s. Going forward, central bank activity will likely be as important to future exchange rates as economic strength.

The rate of domestic import growth has fallen over the past few years, largely due to the increase in global energy production. This positive development has led many to be hopeful that the U.S. balance of trade (exports less imports) would change from a deficit to a surplus. The recent strength of the U.S. dollar, however, has complicated the issue. With imported goods cheaper at home and exported goods more expensive abroad, it is likely that the balance of trade will widen in the near term.