2nd Quarter 2015 Market Commentary

Exciting global economic news dominated the second quarter, yet financial markets recorded modest movements. The US stock market recorded a small, positive result, and the S&P 500 Index is up 1.23%. International stocks rose at first, but fell as Greece struggled to repay its debts. The MSCI EAFE Index is up 5.52% year to date. Emerging markets inched higher, and the MSCI Emerging Markets Index is up 2.95%. Real estate saw a major correction, particularly in the US, as interest rates rose. The S&P Global REIT Index is now down -4.09% for the year. Commodities gained, but the Bloomberg Commodity Index is still negative -1.56% through June 30.

In April, European stocks hit a new high, breaking a record set in March 2000. [1] The European Central Bank’s bond-buying program boosted European stocks. Although the Euro rose against the US Dollar to $1.19, it is well below its value of $1.34 a year ago. In May, France and Italy recorded positive GDP growth. France is the second largest economy in the Eurozone. Italy is the third largest.[2] European stocks retreated when Greece missed a payment to the International Monetary Fund. The broader outlook for the Eurozone economy remains optimistic.

The US economy contracted -0.2% in the first quarter. This was the Bureau of Economic Analysis’ third revision on June 24, 2015. [3] Falling exports caused much of the contraction. It is not clear if strength of the US dollar or a labor dispute at West Coast ports led to the decrease. For the fifth year in a row, first quarter GDP was negative. In each of the previous five years, annual GDP growth was slow but positive. The Federal Reserve Board reduced its GDP forecast in March and again in June. [5] Chairman Janet Yellen signaled the Fed will still raise rates in 2015. Yellen stated to Congress in mid July:

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds target”. [6]

Perhaps bond market investors finally believe interest rates will rise. Treasury yields increased a bit during the quarter. The 2-year Treasury yield increased from 0.56% to 0.64%.  The 10-year Treasury increased from 1.94% to 2.35%. And the 30-year Treasury increased from 2.54% to 3.11%. Rising interest rates put downward pressure on bond prices.  Investors in need of income may finally receive some relief. Interest rates have a ways to go to reach historical norms. Bond investors should prepare for volatility during this time.

Treasury Rates Over Time: The Long Decline


Regulations passed after the 2008-2009 financial crisis caused banks to reduce their bond inventories. This may be problematic if too many investors try to sell at once. It will be important for investors to be patient if such a situation should occur. Exchange traded funds (ETFs) create instant liquidity in underlying markets that are not liquid. High yield and emerging market bonds need hours and sometimes days to trade. This synthetic liquidity of bond ETFs is a concern in a panic selling situation.


The quarter ended with the continuation of a multi-year debt crisis in Greece. On June 27, the Eurozone rejected a Greek request for a one-month bailout extension. Greece then defaulted on a €1.55 billion payment to the International Monetary Fund. [7] Before the bailout rejection, Greek Prime Minister Alexis Tsipras announced a public referendum on the Eurozone’s proposed budget cuts. The Greek government planned to campaign for a “NO” (or Oxi in Greek) vote. Meanwhile Greek banks shutdown, allowing citizens to withdraw no more than €60 per day. The situation is dire for Greek citizens. But, economists do not expect contagion in the Euro currency and banks.  They’ve had four years to prepare for the inevitable. Despite the exciting headlines, Greece is not a major concern for diversified investors. Greece’s GDP is $238 Billion[8], roughly the same size as the GDP of Louisiana.[9]

Puerto Rico

Puerto Rico’s debt troubles also made headlines near quarter end. The US territory has more than $70 Billion of municipal debt outstanding. On June 28, Puerto Rico’s Governor Alejandro Garcia Padilla admitted that the island’s “debt is not payable”. [10] Puerto Rico may miss a payment on $36 million of bonds maturing August 1st. Barring a federal bailout, the island may request a debt restructuring from its bondholders. As Puerto Rico continues to make headlines, the municipal bond market may experience volatility. Now more than ever, skilled credit analysts are crucial to any municipal bond strategy.

The US stock market remains near all-time highs. The phrase “all-time highs” seems to make investors nervous. These nerves are understandable considering the stock market’s performance over the past 15 years. There were two major bear markets following the last two market peaks. But investors must remember that past performance is no predictor of future performance. The US stock market reached new all-time highs for 20 years between 1980 and 2000. In comparison, the current bull market has recorded new all-time highs for two years. Of course there will be other bear markets, but trying to guess when is a loser’s game. Disciplined, long-term investing requires both patience and courage. Investors who can remain in their seats have a chance to earn the market’s return.


Blair DuQuesnay, CFA, CFP®

July 2015




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[1] “European Stocks Set New Record”, Wall Street Journal, Tommy Stubbington, April 9, 2015.

[2] “Eurozone GDP Growth Accelerates, Boosted by France, Italy”, Wall Street Journal, Hannon, Horobin and Zampano, May 13, 205.

[3] US Bureau of Economic Analysis, www.bea.gov.

[4] “US Economy Contracted 0.7% in First Quarter,” New York Times, Nelson Schwartz, May 29, 2015.

[5] “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2015”, June, 17, 2015.

[6] Chair Janet L. Yellen, “Semiannual Monetary Policy Report to the Congress”, July, 15, 2015, http://www.federalreserve.gov/newsevents/testimony/yellen20150715a.htm

[7] “Eurozone Finance Ministers Reject Greek Request for One-Month Bailout Extension”, Wall Street Journal, Gabrielle Steinhauser and Viktoria Dendrinou, June 27, 2015.

[8] World Economic Outlook Database, April 2015, International Monetary Fund, www.imf.org

[9] Bureau of Economic Analysis, “Broad Growth Across States in 2014”, June 10, 2015, www.bea.gov.

[10] “Puerto Rico’s Governor Says Island’s Debts are ‘Not Payable’”, New York Times, Michael Corkery and Mary Williams Walsh, June 28, 2015.