Quarter Review
As I’ve stated before, the market does not like uncertainty, and there was plenty of it in the 2nd quarter of 2015. Questions about an improving US economy and potential Fed interest rate hike, as well as concerns over the Greek debt crisis left investors in a state of flux for most of the quarter.
As the June deadline approached for Greece to make a debt repayment to the International Monetary Fund, fears of default and stalled negotiations on debt relief sent markets, particularly international, spiraling downward as the quarter came to a close. In addition, there was much anticipation as to whether the US Federal Reserve would raise interest rates during their June meeting and questions around a slowdown of corporate earnings.
A quarter of uncertainty left the S&P 500 and the international EAFE Indexes in negative territory. Uncertainty also weighed on fixed income categories and REITs as most sectors within posted quarterly losses. Commodities were a standout, producing strong gains after being in negative territory for the majority of the last few years.
Forward Expectations
With a potential short term resolution in Greece at hand, the focus on the quarter should shift back to corporate earnings and the Fed meeting in September. Daily equity index movements should be driven by corporate earnings reports until we get closer to the Fed meeting in September, where we expect the volatility to increase with every economic data point released.
We expect the current environment will allow the Fed to raise rates in 2015 at either the September or December meeting. Unemployment is below the level at which they stated as a basis for an increase. If we see strong earnings and economic data, the likelihood will increase for a September hike. We do believe the Fed will be very cautious in both their initial and subsequent rate increases. The rational is that as both US and world economies seem very fragile, their being too aggressive with rate increases could cause an unwanted decline in economic health and push us into recessionary conditions.
Model Allocation
We kept our model allocations consistent throughout the quarter as we felt the volatility would be short lived and our portfolio decisions are based on longer term assumptions. Our thoughts held true as July has already seen a sharp recovery in most markets due to the Greek resolution and lack of Fed rate hike. We are keeping a close eye on our tactical holdings for a potential allocation change within the current quarter due to changes in long term expectations.
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.
