The first quarter of 2015 was a study in contradictions. It was not a robust period for the US economy, but we saw domestic markets make new highs. Oil prices have plummeted, in spite of increased volatility in the Middle East. The US Dollar surged against most foreign currencies, even as interest rates fell yet again. If I tried to outguess the markets, I would probably be at my wits end.
Thankfully, there is a more sensible approach. We can research the dimensions of expected returns, design highly diverse portfolios that pursue market premiums, and build flexibility into the system so that we efficiently and consistently serve up investment solutions for a wide range of needs, in spite of the seemingly incomprehensible gyrations of short term market movements.
World Asset Classes
Looking at broad market indices, developed markets outside the US outperformed both the US and emerging markets during the quarter. US REITs outperformed US broad equity market indices. Growth indices outperformed value indices across all size ranges in the US and in non-US and emerging markets. Small cap indices outperformed large cap indices in all regions, particularly in the US.
The US 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 under-performed across all size ranges.
International Developed Stocks
Developed markets outside the US outperformed both the US and emerging markets indices in US dollar terms. Small caps slightly outperformed large caps. Value indices under-performed growth indices, particularly in large caps. The Swiss franc was the only major developed markets currency to outperform the US 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 US dollar terms, despite the US dollar appreciating vs. most emerging markets currencies during the quarter. Small cap indices outperformed large cap indices. Value indices under-performed growth indices across all size ranges.
Real Estate Investment Trusts (REITs)
US REITs outperformed the broad US equity market during the quarter. In contrast, REIT indices outside the US under-performed broad market non-US equity indices.
Select Country Performance
Russia rebounded from its double-digit negative returns in the fourth quarter, recording the highest emerging markets return as the ruble climbed against the dollar and Russian energy stocks posted strong performance. Greek financial stocks influenced the performance of the local market, which recorded the lowest return among emerging markets countries. Despite the fall in the Danish krone, Denmark produced the highest return among developed markets countries.
Commodities were broadly negative during the first quarter. The Bloomberg Commodity Index fell 5.94%. Lean hogs led the decline, shedding 23.73%, while coffee and nickel followed by losing 21.59% and 18.55%, respectively.
Within the energy complex, WTI crude oil fell 14.87% and natural gas declined 11.02%.
Silver was the biggest gainer, returning 6.13%, and cotton followed with a gain of 4.25%.
Interest rates across the US 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%.
Municipal revenue bonds (1.13%) slightly outpaced municipal general obligation bonds (0.87%). Long-term muni bonds outgained all other areas of the muni curve, returning 1.58%.
The Accountable Portfolios℠ illustrate the performance of different global stock/bond strategies and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.