Quarter Review
The volatility we saw in the 4th quarter of 2014 continued throughout the first quarter of 2015. The primary driver of the volatility was an increased expectation amongst economists that the U.S. Federal Reserve would raise interest rates as early as June. A second factor was sub-par earnings reports that produced a perceived slowdown in US production.
For the quarter, the S&P 500 squeezed out a slight gain of less than one percent. Conversely, the international markets (EAFE Index) produced a gain of over 5%. The shift signaled a belief that the similar European and Japanese monetary policies, which helped US markets for the last few years, are beginning to have the same positive effects across seas.
Forward Expectations
In the mid to long term, we continue to see positive environments for both domestic and international equities. However, in the short term, we believe international markets show the best potential return due to more attractive valuations. Further, we believe monetary policies overseas will remain accommodative for a longer period than domestically. We do not believe the Fed will raise US rates in June and will be extremely cautious when they finally do decide to act.
Model Allocation
For equities, during the quarter we reduced a small portion of our domestic equity exposure and increased our international exposure. While we still believe the equity markets will do well over the mid and long term, we feel the US markets are slightly overvalued in the short term, whereas Europe and Asia have more attractive valuations. Although we do not believe the Fed will raise rates in June, we do believe foreign monetary policies will continue to be more accommodative for a longer period of time. We made little change to our fixed income portion and are still looking for yield while being conscious of interest rate risk. As a new position, we added a dollar hedge to European equities which has taken advantage of a strong dollar and international equity outperformance.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vavracapital.com
Website: www.vavracapital.com
Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
