Investment Review for Second Quarter 2015

Performance was muted during the second quarter, with global stocks increasing only 0.3% and core bonds falling 1.7%. More noteworthy, however, was the return of volatility in certain areas of the financial markets. Domestic large company stocks experienced only one trading day thus far in 2015 where there was a 2% gain or loss from the prior day’s close. In contrast, the Eurozone experienced 12 days, and China experienced 38. In fact, four of the 38 days had losses that exceeded 6%. This trend appears to be continuing into the third quarter.

Major asset class returns.

Emerging market stock performance.

As a whole, emerging market stock values have risen 2.9% year to date. Performance, however, differs significantly by country. The 14.7% rise in Chinese stocks is particularly noteworthy because the country represents 24.8% of the emerging markets index. For emerging market managers who have avoided Chinese stocks due to concerns about excess valuations and extravagant price swings, performance has been less than stellar and lags behind the index year to date.

Home prices.

Over the past few years, home prices have continued to rise on a national level and now stand at just 8% below their 2006 peak levels. On the local level, some cities have grown faster than others. Both San Francisco and Denver area homes have seen a 10% price increase over the past 12 months. As a result, San Francisco home prices are just shy of their 2006 peak, while Denver home prices now exceed their 2006 levels by over 20%.

U.S. dollar vs. major trading partners.

The U.S. dollar strengthened as a result of stronger domestic economic growth, central bank activity at home and abroad, and as fears associated with Greek insolvency increased. When compared to other major currencies, the U.S. dollar appreciated over 18% during the past 12 months. This is great news for consumers, but terrible news for U.S. exporters whose products now seem expensive abroad. In addition, foreign revenues of major U.S.-based multinational corporations are less when converted back to U.S. dollars, a negative for overall corporate profitability.

Oil prices and the incentive to drill.

Approximately one year ago, oil prices began their decline from over $110 per barrel to less than $50 in January of 2015. With oil prices low, the incentive to drill more wells has fallen dramatically. This is clearly displayed in the U.S. rig counts that have fallen from over 1,800 to fewer than 900. As such, it is likely that domestic oil production will decline in the future as the supply in previously drilled wells is exhausted.

Greece’s gamble.

Alexis Tsipras and the Greek people have rejected the European bailout package and missed a €1.5 billion payment to the International Monetary Fund. This is the first of many payments the Greeks owe international creditors over the next several months. With no agreement in sight, the European Central Bank decided not to expand an emergency loan program that had been propping up Greek banks in recent weeks while the government tried to reach a new deal with international creditors. With no funding for its banks, the Greek government was forced to close banks and institute capital controls, leaving citizens strapped for cash and unable to purchase foreign goods.

Puerto Rico debt crisis.

Puerto Rico has been struggling with a government debt crisis for several years. Following the June release of a government report outlining the extent of the problem, bonds issued by the commonwealth were downgraded further into junk territory. In the end, it is unlikely that bondholders will see their investment repaid in full.