Investment Review

Summer 2015

During the second quarter, 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 second quarter.

• European Stocks Set New Record
• China’s Economy Hits Slowest Growth since 2009
• Nasdaq Composite S&P 500 Close at New Highs
• US Jobless Claims Fall to Lowest Level in 15 Years
• Eurozone GDP Growth Accelerates, Boosted by France, Italy
• Home Building Surges to Best Pace since 2007
• US Economy Contracted 0.7% in First Quarter
• Economists See Bright Consumer Outlook
• Fed Flags Slow Pace for Rate Hikes
• Eurozone Finance Ministers Reject Greek Request for One-Month Bailout Extension
• Oil Prices Gain in Second Quarter

 
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, emerging markets outperformed both the U.S. and developed international markets during the quarter. Reversing the trend in the first quarter, REITs (including both global and U.S. REITs) recorded the lowest performance in developed markets in the second quarter.

The value effect was positive in emerging markets but negative in developed markets, including the U.S. Small caps outperformed large caps in the U.S., non-U.S. developed markets, and in emerging markets. The U.S. dollar had mixed performance during the quarter.

Benchmark Funds	Q2 2015	12 Months Ending 6/30/2015
U.S. Large Cap Vanguard 500 Index Fund	+0.3%	+7.3%
U.S. Large Cap Value iShares Russell 1000 Value Index	+0.1%	+4.0%
U.S. Small Cap iShares Russell 2000 Index	+0.4%	+6.5%
U.S. Small Cap Value iShares Russell 2000 Value Index	-1.2%	+0.7%
International Vanguard Total International Stock Index Fund	+1.3%	-4.6%
Emerging Markets Vanguard FTSE Emerging Markets ETF	+1.0%	-2.8%
U.S. REITs Vanguard REIT ETF	-10.5%	+3.7%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	-1.8%	+1.8%

 
Individual Asset Classes

U.S. Stocks

The US equity market recorded slightly positive performance for the quarter. Small caps outperformed large caps, helped by the strong performance of micro cap stocks. Mid caps recorded the lowest return across the size ranges. Value underperformed growth marketwide. Large value and large growth recorded similar performance, while the mid cap value and small cap value indices underperformed their growth counterparts.

Developed International Stocks

Developed international markets outperformed the U.S. equity market but underperformed emerging markets indices in U.S. dollar terms. Small caps significantly outperformed large caps. Value underperformed growth indices across all size ranges, and particularly in small caps.

Emerging Markets Stocks

During the second quarter, emerging markets indices outperformed developed markets indices, including the U.S., in U.S. dollar terms. Small cap indices significantly outperformed large cap indices for the quarter. Value outperformed growth marketwide, influenced by the strong performance of large caps. Value indices underperformed growth indices in both mid caps and small caps.

Real Estate Investment Trusts

REITs both in the U.S. and non-U.S. markets significantly underperformed the broad equity markets during the quarter.

Investment-Grade Bonds

Interest rates across the U.S. fixed income markets generally increased during the second quarter. The 5-year Treasury note added 25 basis points to end the period yielding 1.63%. The 10-year Treasury note increased 42 basis points to end the quarter at 2.35%. The 30-year Treasury bond added 56 basis points to finish with a yield of 3.10%.

On the short end of the curve, the 2-year Treasury note added 8 basis points to finish at 0.64%. Yields on securities within one year to maturity were generally lower by 2 basis points. Short-term corporate bonds gained 0.06%, while intermediate-term corporate bonds lost 1.09%. Short-term municipal bonds were relatively unchanged, but intermediate municipal bonds declined 0.89%. Municipal general obligation and revenue bonds experienced similar returns.

 

In Conclusion
Financial news about Greece and China has been in the headlines recently. Read our Investment Commentary for our current thoughts on these countries, and how your portfolio may be affected.