Quarterly Market Letter – 1Q 2015

Kerry300x300The equity markets were flattish in the first quarter of the new year with the S&P 500 Index registering a gain of +.95%.  This comes on the heels of a fourth quarter gain from last year of +4.93%.  So, a slow start to the year but nothing to be too disappointed about. 

Sector performance continued the wide dispersion we witnessed in 2014.  The top three sectors (including dividend income) for the first quarter were Health Care (+6.53%), Consumer Discretionary (+4.80%) and Telecommunications (+1.54%).  The laggards were Utilities (-5.17%), Energy (-2.85%), and Financials (-2.05%).  Last year we noted that for 2014 the difference between the best performing sector (Utilities, +24%) and the worst performing sector (Energy, -9.99%) was a whopping 34%.  Annualizing first quarter returns (calculations not shown), the difference between the best sector (Health Care) and the worst sector (Utilities) is almost 48%.  Market performance was also wildly divergent between growth and value shares, with growth stocks outpacing value by +4.56% (value -.51% vs. growth up 4.05%) in the quarter as measured by the Russell 3000 index.

There’s a subtlety to note here:  Utilities were the best performing sector in all of 2014 and the worst performing sector as we start the New Year.  International markets?  Same thing: The widely followed EAFE Index lost -4.22% in 2014 and got it all back in the first quarter of 2015, registering a return of +5.04%.  Although these “reversions to the mean” are something that happen all the time, divergence and volatility like this are hard to navigate because of the unknown timings with which they occur.

Meanwhile, the fixed income markets seem to be taking things in stride.  Rates are low-to-declining but the whip-sawing moves remain.  Rates on the ten year Treasury began the quarter at 2.16% and ended the quarter slightly down at 1.92% as prices rose modestly.  Peak to trough during the quarter was a high of 2.24% against a low of 1.64%, for a difference of .60%, or 60 basis points.  Sixty basis points might not sound like much, but it’s approaching 37% of the low rate mark.  To add a little perspective, that’s approximately a -5.25% price decline over a period of about six weeks.  Up to a point it’s better to be patient than wrong. The Barclays Intermediate Government/Credit Index gained +1.45% for the quarter.

The equity markets were flattish in the first quarter of the new year with the S&P 500 Index registering a gain of +.95%.  This comes on the heels of a fourth quarter gain from last year of +4.93%.  So, a slow start to the year but nothing to be too disappointed about. 

Sector performance continued the wide dispersion we witnessed in 2014.  The top three sectors (including dividend income) for the first quarter were Health Care (+6.53%), Consumer Discretionary (+4.80%) and Telecommunications (+1.54%).  The laggards were Utilities (-5.17%), Energy (-2.85%), and Financials (-2.05%).  Last year we noted that for 2014 the difference between the best performing sector (Utilities, +24%) and the worst performing sector (Energy, -9.99%) was a whopping 34%.  Annualizing first quarter returns (calculations not shown), the difference between the best sector (Health Care) and the worst sector (Utilities) is almost 48%.  Market performance was also wildly divergent between growth and value shares, with growth stocks outpacing value by +4.56% (value -.51% vs. growth up 4.05%) in the quarter as measured by the Russell 3000 index.

There’s a subtlety to note here:  Utilities were the best performing sector in all of 2014 and the worst performing sector as we start the New Year.  International markets?  Same thing: The widely followed EAFE Index lost -4.22% in 2014 and got it all back in the first quarter of 2015, registering a return of +5.04%.  Although these “reversions to the mean” are something that happen all the time, divergence and volatility like this are hard to navigate because of the unknown timings with which they occur.

Meanwhile, the fixed income markets seem to be taking things in stride.  Rates are low-to-declining but the whip-sawing moves remain.  Rates on the ten year Treasury began the quarter at 2.16% and ended the quarter slightly down at 1.92% as prices rose modestly.  Peak to trough during the quarter was a high of 2.24% against a low of 1.64%, for a difference of .60%, or 60 basis points.  Sixty basis points might not sound like much, but it’s approaching 37% of the low rate mark.  To add a little perspective, that’s approximately a -5.25% price decline over a period of about six weeks.  Up to a point it’s better to be patient than wrong. The Barclays Intermediate Government/Credit Index gained +1.45% for the quarter.

Oil is, well, oil, ending the quarter at $47.60/bbl, about $1.00/bbl lower than the quarter average.  Peak to trough was $53.53 to $43.46, or a decline of almost -19% during a four-week period mid-quarter. 

The US Dollar continued to strengthen during the quarter.  On 1/1/2015 it took about $1.21 dollars to buy a Euro.  Now it takes $1.07, after hitting its strongest point mid-March at $1.05.  Since the Euro was officially created in 1999, the dollar has only been stronger than the Euro during approximately the first three years of its existence.  Since its creation the average has been $1.22. 

It’s widely expected that later this year the Fed will impose the first hike in the Fed Funds rate since June 2006.  Looking to the futures market, currently there is a 70% chance the Fed will start their move toward normalizing interest rates sometime this fall.

It’s now been 1,285 calendar days (roughly 3.5 years) since we’ve had a correction of more than 10%.  We are also coming off six consecutive years of gains in the stock market.  Historically the equity markets have never risen seven years in a row.  We expect gains for both stocks and bonds to be muted this year given the expectation of rising rates and the strength and longevity of the bull market that started in 2009.  The prospect of crude oil fluctuations, a rising dollar and rising interest rates could certainly create significant volatility as we progress throughout the year. Although volatility can be unsettling when watching it on the 6 o’clock news, we believe it is no reason to deviate from the philosophy of sticking to a sound long-term investment plan.  We remain committed to our fundamentally driven, research focused investment process to seek out investments that will thrive in the years ahead.


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