Presented by Rich Tegge
U.S. markets continue their rise
June was another strong month for U.S. equity markets, as the S&P 500 Index rose 2.07 percent and the Nasdaq an even stronger 3.90 percent. The Dow Jones Industrial Average was the laggard, gaining 0.75 percent.
For the quarter, results were even stronger, with the S&P 500 up 5.23 percent, the Nasdaq up 4.98 percent, and the Dow again bringing up the rear with a gain of 2.83 percent. The Dow and the S&P 500 have shown steady gains since the pullback in April, while the Nasdaq has made most of its gains in the past six weeks or so.
Markets continued to hit new records throughout June. Gains were driven by continued earnings growth, with an estimate for second-quarter growth of 5.1 percent, per FactSet. Technicals stayed strong, with all three major U.S. indices well above their moving averages.
The MSCI EAFE Index was up 0.96 percent for June and 4.09 percent for the quarter. These results came despite European Parliament elections described as a political earthquake (winners included a large Eurosceptic component), as well as continued disappointing economic results in major European countries. To encourage growth, the European Central Bank cut rates again and imposed negative interest rates on banks, attempting to spur lending.
Emerging markets, represented by the MSCI Emerging Market Index, also had a strong quarter, gaining 6.60 percent, capped by a 2.66-percent gain in June. Technical signs for emerging markets are positive and improving.
Fixed income was an interesting asset class for the quarter, with the 10-year Treasury rate defying analyst expectations and declining, from a high of more than 2.80 percent in early April to a value of 2.53 percent at the end of June, with significant volatility during the period. The decline in rates in the U.S. was echoed by similar declines around the world.
U.S. economic recovery continues despite rough first quarter
The economic surprise of the month and quarter was the low final number for first-quarter gross domestic product (GDP) growth, revised down to a 2.9-percent decline from a previous estimate of minus 1 percent. The magnitude of the revision called into question whether the recovery was faltering, but the consensus is that it continues and is accelerating.
The disappointing results were partially due to revisions in health care spending, which was expected to increase but actually decreased (see chart). The change appears to be due to problems with the data created by the start of the Affordable Care Act.
Much of the economic data for the U.S., in fact, is at multiyear highs, especially in employment. Recently, we had four straight months of job growth of more than 200,000. Wages and income are growing while hours worked remain at the highest level since August 2008.
International risks move back to the forefront
The real risks for the quarter were international. Even more worrying than the European election results and Europe’s continued slow growth was the deteriorating situation in Iraq. Oil prices rose in the quarter, though not as much as expected. Still, a potential spike in oil prices remains the most direct economic risk to the U.S. recovery.
China also remained in the headlines, as conflicts in surrounding seas continued. Finally, the situation in Ukraine seemed calmer but continued to simmer.
Strong market should not breed complacency
The strong results from equity markets have been encouraging. At the same time, market volatility has declined to very low levels, which historically has signaled storms ahead.
Although we see no signs of immediate concern, we are aware that the current positive conditions will change at some point, with a consequent negative market reaction. Such a correction would be normal, though, and we remain confident in the U.S. economy and our excellent positioning in the world. We believe that a well-diversified portfolio, rebalanced regularly, remains the best way to meet financial goals over time and should be maintained through good times and bad.