On the heels of another strong year for US equities in 2014, the first quarter of 2015 reignited fears of stretched valuations, slowing growth, and tightening monetary policy. Despite these concerns, the S&P 500 was able to gain a small but positive 1.0% for the quarter. Small-cap US stocks fared much better for the quarter (Russell 2000: +4.3%), reversing the trend of underperforming their larger counterparts.
Most importantly, the Federal Reserve positioned itself for a potential rate lift-off in the third quarter, setting a path toward normalization of interest rates despite the fact that economic growth "moderated somewhat" in the second half of the quarter. The Fed removed the term "patient" from its policy statement, signaling that it could raise the overnight rate as early as June, although concerns over slowing wage growth and a desire to see "further improvement in the labor market" should push the decision until at least Q3.
After a dismal 2014, international equities had a nice rebound in Q1 as measured by the MSCI EAFE (+4.9%) and the MSCI Emerging Markets (+2.2%). Many emerging market economies continue to feel the impact of lower commodity and oil prices as well as a strengthening US dollar. International central banks were busy during the quarter:
- The Bank of England unanimously approved keeping the overnight lending rate at 0.5% as inflationary readings neared zero and signs of an economic slowdown emerged.
- The Swiss National Bank unexpectedly removed its three-year policy of capping the 1.20 Swiss francs to the euro.
- The Bank of Japan retained its plan of increasing the monetary base by 80 trillion yen.
- The People's Bank of China slashed the reserve ratio by another 50 bps.
- And most significantly, the European Central Bank committed to purchasing 1.1 trillion euro of sovereign debt in hopes of reflating the economically troubled region.
Fixed income indexes gained across the board in the first quarter, with the exception of international bonds, which were down 4.6% as represented by the Barclays Global Aggregate ex-US. The Barclays Municipal 1-10 Year Blend gained 0.8%, while the Barclays US Aggregate gained 1.6%. High- yield securities experienced the largest quarterly gain; the BofA Merrill Lynch High Yield Master II was up 2.5%.
Commodities and Real Estate
Commodities (DowJonesUBSCommodityIndex:-5.9%) and oil (CrudeBrent: -3.9%) continued the prior year's decline into 2015. Alternatively, real estate investments (MSCI US REITs: +4.5%) continued to see strong gains despite mixed economic data. New home sales reached a 7-year high in February, while existing home sales were constrained by a lack of inventory.
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