Investment Review
Spring 2015
During the first three months of the year, investors were rewarded for being globally diversified. International developed and emerging markets returned 2.2% and 3.8%, respectively. U.S. stocks reversed a multiyear trend of beating international stocks and returned 1.8% for the quarter. Global real estate stocks returned 4.4% for the year, to date.
The dollar reached a 12-year high, partially driven by Greece’s woes in the Eurozone. The Federal Reserve again deferred raising interest rates, keeping them at nearly zero in an effort to strengthen the economy. Despite the Fed’s caution and recent performance of international stocks, the U.S. is seen as one of the strongest markets in the world.
Below are some of the headlines during the first quarter.
- U.S. Job Growth Strongest Since 1999
- Global Government Bond Yields Hit New Lows
- Weak Economic Outlook Raises Worries about Demand for Crude
- Inflation Well Short of Fed’s 2% Target
- Janet Yellen Puts Fed on Path to Lift Rates
- Japan Shares Hit Fresh 15-Year High
- Nasdaq Composite Ends Above 5,000 for the First Time Since Dot-Com Era
- Euro’s Tumble Brings It Closer to Parity with U.S. Dollar
- Household Wealth Hits Highest Level Ever
- Strong Dollar Hammers Profits at U.S. Multinationals
- U.S. Government Bonds Rise for Fifth Straight Quarterly Gain
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.
Investment Review
Looking at broad market indices, developed markets outside the U.S. outperformed both the U.S. and emerging markets during the quarter. U.S. REITs outperformed U.S. broad equity market indices. Growth indices outperformed value indices across all size ranges in the U.S. and in non-U.S. and emerging markets. Small cap indices outperformed large cap indices in all regions, particularly in the U.S.
| Benchmark Funds | Q1 2015 | 12 Months Ending 3/31/2015 |
| U.S. Large Cap Vanguard 500 Index Fund |
+0.9% | +12.6% |
| U.S. Large Cap Value iShares Russell 1000 Value Index |
-0.8% | +9.0% |
| U.S. Small Cap iShares Russell 2000 Index |
+4.3% | +8.3% |
| U.S. Small Cap Value iShares Russell 2000 Value Index |
+1.9% | +4.4% |
| International Vanguard Total International Stock Index Fund |
+4.0% | -1.1% |
| Emerging Markets Vanguard FTSE Emerging Markets ETF |
+2.3% | +3.4% |
| U.S. REITs Vanguard REIT ETF |
+4.7% | +24.0% |
| Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF |
+1.5% | +5.7% |
Individual Asset Classes
U.S. Stocks
The U.S. equity market recorded positive performance for the quarter. Small caps outperformed large caps, helped by the strong performance of small cap growth stocks. Value indices underperformed across all size ranges. U.S. REITs outperformed broad U.S. equity indices.
Developed International Stocks
Developed markets outside the U.S. outperformed both the U.S. and emerging markets indices in U.S. dollar terms. Small caps slightly outperformed large caps. Value indices underperformed growth indices, particularly in large caps. The Swiss franc was the only major developed markets currency to outperform the U.S. dollar. The Swiss central bank removed the three-year currency cap to the euro.
Emerging Markets Stocks
As a group, emerging markets earned positive returns in U.S. dollar terms, despite the U.S. dollar appreciating versus most emerging markets currencies during the quarter. Small cap indices outperformed large cap indices. Value indices underperformed growth indices across all size ranges.
Russia rebounded from its double-digit negative returns in the fourth quarter and returned 18.9% for the first three months of 2015. Russia was the best-performing emerging market country as the ruble climbed against the dollar and Russian energy stocks posted strong performance. Greek financial stocks influenced the country’s performance, resulting in a loss for the quarter of 26.0%, the lowest return among emerging markets countries. Despite the fall in the Danish krone, Denmark produced the highest return among developed markets countries at 14.2%.
Real Estate Investment Trusts
U.S. REITs outperformed the broad U.S. equity market during the quarter. In contrast, REIT indices outside of the U.S. underperformed international equity indices.
Investment-Grade Bonds
Interest rates across the U.S. fixed income markets generally declined in the first quarter. The 5-year Treasury note dropped 28 basis points to end the period yielding 1.38%. The 10-year Treasury note declined 24 basis points to finish at 1.93%. The 30-year Treasury bond fell 21 basis points to finish with a yield of 2.54%.
On the short end of the curve, the 2-year Treasury note shed 12 basis points to finish at 0.66%. Securities within one year to maturity were relatively unchanged. Long-term corporate bonds returned 3.29% for the quarter. Intermediate-term corporate bonds followed, by adding 1.89%. Long-term muni bonds outgained all other areas of the muni curve, returning 1.58%.
In Conclusion
The S&P 500 has tripled in six years. While there is still concern about the U.S. economy, international markets are much more troubled. It is widely believed that the Fed will begin to raise rates later this year, which may cause temporarily negative returns for bonds. As we wrote last year, rising rates would likely produce short-term losses and later generate higher returns for the asset class. As always, short-term volatility is to be expected in any stock or bond investment. Only cash reserves promise principal safety; we recommend holding cash reserves for emergency needs and known expenses expected within the next two to five years.
