To some degree, the first quarter was the mirror image of what we saw for the entirety of 2014. As you may recall, for the whole of last year, US large company stocks did well, while returns in many other categories – international and emerging market stocks and US small company stocks – were somewhere between mediocre and poor. During the first quarter of 2015, however, we saw mediocre returns in US large companies (the Dow Jones and S&P 500 indices were both up less than 1% for the quarter), while the broad European market was up approximately 3.5% and Asian markets were up closer to 9% for the quarter, both in US dollar terms. What a difference a quarter can make!
Making the performance of internationals a bit more impressive is that during the same quarter, the dollar continued to rise against most foreign currencies and this amounted to a significant headwind that international stocks have had to fight against in order to just break even. For example, the Portuguese stock market surged by over 20% in the first quarter for European investors, but because the US dollar also surged by almost 10% against the euro during the same time period, the returns from the Portuguese market expressed in US dollar terms were a much more modest, but still respectable, 10%.
In case you’re wondering why one would even want to own internationals if they always have to fight such a headwind, the answer is that they don’t always have to fight against a rising dollar; there are many periods in which the dollar has fallen against other currencies, and when this happens, US investors are the beneficiary of what can be a very substantial tailwind as we saw in the first five years of this century.
In general, the picture in Europe looks a bit better today than it did six months ago with the initiation of Europe’s own version of quantitative easing whereby the European Central Bank buys Eurobonds to push down interest rates, similar to what the Federal Reserve Bank did here in the US. Additionally, the European Markit’s® manufacturing purchasing managers index rose to a 10-month high of 52.2 in March, with incoming business picking up and companies saying they were hiring at the fastest pace in more than 3½ years.
Meanwhile, here in the US, more Americans are working, with the U.S. unemployment rate now at 5.5% and reaching levels that are actually below the long-term norms. Unemployment today is lower than the rate for much of the booming ’90s and is approaching the lows of the early 1970s.
Additionally, real GDP – the broadest measure of economic activity in the United States – increased 2.4% last year, after rising 2.2% the previous year. America is growing. Not rapidly, but slow growth might not be so terrible. Rapid economic growth has, in the past, often preceded economic recessions, where excesses had to be corrected. Slow, steady growth may be boring, but it’s certainly not horrible news for the economy or the markets.
Overall, the first quarter was not a terrible quarter for investors or economies around the globe, and it was a good example of why we diversify and how little last year’s performance tells us about this year’s.
I hope you’re enjoying the start of Spring. I was out of town for a week and half and when I returned to Denver today, there were many buds that weren’t here when I left. As always, please let me know if you have any questions or if there is anything we can do for you.