Stocks continued their interest rate-influenced rally in the second quarter, shrugging off an unexpected British referendum result to finish the quarter up 2.45%.i See Chart 1. At this point, most of the major stock market averages have overcome everything that has threatened to end the bull market over the past year - slumping earnings, problems in China, diminishing employment growth, and Brexit – and are at or near all-time highs. While the market as a whole is still below its all-time highs, the fact that is has performed this well in the face of so many challenges speaks to the desperation that individuals, pension fund managers, insurance companies, and even foreign institutions have in trying to generate adequate investment returns. Too much money is chasing too few return sources.
CSFC Market Commentaries
It was a tale of two half quarters. The first six weeks saw equities go straight down on fears that the Federal Reserve would continue hiking rates in 2016 and the result would be a global recession led by the emerging markets. The last seven weeks of the quarter produced a spectacular rally as the Fed backed away from its planned rate hikes and risky assets began to recover.
In a way, 2015 was a lot like 2011. Markets muddled through the first half of the year, then plummeted in the third quarter before staging a modest recovery in the fourth quarter. Like four years ago, large stocks rallied enough to close the year with a gain while mid and small cap stocks had a much smaller bounce and finished with losses.
Stock markets worldwide sold off during the third quarter. See Chart 1. July began with a modest rally, but it was confined to certain sectors and failed to lift the average stock. In mid-August the market completely rolled-over. The cause most frequently cited was global economic concerns, specifically China.
Financial assets had a tough second quarter. Interest rates rose while corporate profits dipped. Greece was once again in the headlines, this time joined by Puerto Rico and China. Those negatives were offset by continued growth and rising employment in the U.S. economy combined with economic improvement in Japan and Europe. It seems like we have been on the verge of a Greek default since 2012 and an interest rate hike since the summer of 2013. At some point, investors got tired of the “crying wolf” aspect of these two crises, lifting stocks up over 60% since the summer of 2012. Now, however, those situations are too pressing to ignore, and that is proving to be an increasingly strong headwind for both bonds and stocks.
The U.S. economy improved modestly in the first quarter of 2015. The bigger story, however, was how well the rest of the world’s developed markets responded to financial stimulus. In the U.S. quantitative easing has been a fact of life since 2009 and the stock market is up over 200% from the March 2009 lows.