June 2015 Monthly Strategy Dashboard

Multiple transitions taking place on the economic landscape and in the markets globally have caused stock markets and bond markets to bounce between gains and losses this year as a process of price discovery takes place among asset classes in anticipation of a Fed move to normalize interest rates.

A negative print (i.e., revision lower) on Q1 GDP at the end of May which took growth in the quarter from 0.2% to -0.7% spooked the markets for a spell into thinking that growth was a thing of the past and that sluggish growth would be the operative phrase for the immediate future and perhaps the rest of the year. Expectations for Fed tightening were pushed beyond September, and some market denizens even talked of no increase in rates at all in 2015.

With the release of the May non-farm payroll data on June 3^rd, attitudes changed, growth came back in vogue, and while a healthy degree of skepticism, worry and concern remained beyond the fringes of the market, the effects of positive data revealing strength in housing, auto sales, manufacturing and even retail sales saw negative projections recede if not retreat and modest rallies in stocks ensue.

Investors have been forced to curb their enthusiasm this year even as fundamentals improve as a potential buzz kill and legitimate worry overhangs both stocks and bonds. This spoiler is tied to a lack of liquidity in the bond market stateside caused in no small part by re-regulation that has eliminated participants who in prior economic expansions and normalizations actively traded debt securities and whose willingness to make markets served to provide the bond market with a shock absorber when bond prices and yields changed directions.

In Europe a rally in equities that propelled the Stoxx Euro 600* some16.7% higher in euros (5.86% in USD) from the start of the year through the end of May on the back of the effects of Quantitative Easing (QE) programs and improved economic and corporate fundamentals faded. From the end of May through June 10, the Stoxx Euro 600 fell 2.27% in euros (translated in dollars, the benchmark rose 0.67% on currency gains for the euro) as interest rates in the region relatively surged going from negative to positive in a number of maturities in the region. The German 10-year bund saw its yield rise from 0.54% to just under 1% in the first week of June.

What’s an investor to do in such a transitional environment?

We suggest that investors know what they own, why they own it, and how it might perform in a changing environment. We believe it’s practical as well to maintain "shopping lists" of what one would like to own (or add to a portfolio) if given the opportunity during a period of market turbulence that offers a more attractive entry point.

We also believe that patience is a virtue that will likely be rewarded as economic growth stateside remains sustainable and improves in Europe and Asia. History and experience have taught seasoned investors that healthy markets don’t always move only in one direction.

We also believe that investors should expect that volatility is likely to reassert itself in the marketplace with greater frequency as the transition in interest rates from abnormally low to somewhat normal takes place.

In the current highly transitional environment with prospects for volatility to increase in the near to intermediate term, we believe it is wise to recall that when flying in a commercial airliner, the pilot’s announcement over the intercom and the lighting of the "fasten seatbelts" sign on the overhead console does not indicate that the plane is about to crash but usually gives notice that there is likely some turbulence ahead.

Stay tuned.

*The Europe STOXX 600 is an equity index derived from the STOXX Europe Total Market Index. The index consists of a fixed number of 600 components, representing large, mid and small capitalization companies across 18 countries of the European region.

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