The Slide Continues

We've yet to have any relief from this year's global selloff in stocks. Three weeks into the year and both the Dow Industrial Average and S&P 500 are down roughly 10%. The decline in the U.S. markets is being led by international markets - specifically China and world oil prices.

China's slowdown has investors nervous about the impact on the economies of their trading partners. The Chinese government has proven to be incompetent or untrustworthy in managing their financial markets, currency and economic statistics. So trying to quantify the potential effects abroad has become a bit of a guessing game. As we've mentioned before, the markets hate uncertainty.

Additionally, the resulting decline in commodities prices is causing serious concerns for countries whose economies are primarily built on raw materials exports. The decline in oil prices is the most significant problem for these countries and has the biggest potential to lead to political destabilization. Adding to the worries is the fact that sanctions on Iran are being lifted this week and thus they are now able to sell their oil in the open market. This will only add to the over supply problem.

So should you worry about the stock market? The answer is based on who you are. Participants in specific sectors of the energy industry are, and rightfully should be, worried about their business. The underlying forces that have driven down oil prices are legitimate and likely here to stay for the next couple of years. We doubt the sub $30 per barrel prices are sustainable, but it will likely be a long time before we see $60 (let alone $100). Our thesis has always been that, on balance, cheap oil is a good thing.

 

For the rest of us, this selloff should be seen as a less significant event. It's important in times like these to separate the stock market from the fundamentals. Ignoring the stock market, things look a lot better here in the U.S. We've had pretty good jobs reports the last few months. GDP has been steady and early in the earnings season, corporate profits have been healthy. So we don't view this sharp decline as being driven by the fundamentals.

Instead, this month's market decline appears to be driven by fear and selling pressure from outside the U.S. Our experience has been that these headline driven events tend to be short lived. This is especially true for equity portfolios such as ours. Almost all of our equity positions are constructed using securities that track major indices whose performance is a function of U.S. economic health. We're not making bets on specific sectors of the economy or industries. Therefore, we expect these investments to look past the news and respond to the data over the course of the year, which takes us back to the subject of oil.

Energy costs account for a significant part of everyone's expenses. It's hard to see how a reduction in costs is a bad thing for the rest of us.

A Not So Happy New Year

Technically, this commentary should be about the markets in the fourth quarter, but the real news, and I'm sure what's on everyone's minds, is the selloff in the stock market in 2016. First, we'll dispense with the fourth quarter results.

After a rough third quarter, stocks found their footing in the remaining months of the year and were able to retrace their losses from the summer. The major indices all finished within a percentage point or two of each other at around break even for the whole year. The total return (price change and dividends) for large cap stocks gained about 1% while the small and mid-cap groups were down about a point.

We had felt going into the year that 2015 was going to be a so-so year. These results were slightly lower than we had anticipated, but still mostly in line with our expectations. The volatility was largely driven by renewed concerns over Chinese GDP and the impact of their slowing economy on global trade and commodities demand. This, however, was really more of what we'd call a "headline risk". What we mean by that is the concerns were more about fears over what may unfold in the future as opposed to actual declines in earnings during the year.

The real news in 2015 was that the Federal Reserve officially kicked off their long awaited rate hike campaign. The first interest rate increase was only 0.25% (coming up from zero), but it signaled the official end of the easy money policies and Fed guided market support over the last eight years. This move was long awaited and had been pushed back several times. They probably waited longer than they should have by starting this process last month, but now that they've made their first move, it's expected that they'll steadily continue raising rates for the next few years.

It's believed that the Fed would like to increase the Fed Funds rate up 1% per year for the next three years. This would put the Fed Funds rate at 3%, which is still roughly a point below the historical average. That pace would be pretty aggressive and would be predicated on the stability of the global economy and the U.S. dollar.

This has set the stage for 2016. As of this writing, both the Dow Industrial Average and the S&P 500 are off almost 8% and the NASDAQ is down nearly 10%. Those are very sharp declines in just two weeks. There are three principal reasons for the selloff. In no particular order they are: China GDP, the value of U.S. dollar and the price of oil.

Of the three, we believe the Chinese economic slowdown is the least significant issue. That's not to say that the news isn't having an impact on stock prices, but once again, we believe this is a headline risk and the impact will be overshadowed by other events (good or bad) in the near-term.

The strong dollar is another area of concern for the stock market and is the direct result of the Fed's decision to raise rates. Globally, rates are extremely low and investors are desperately seeking yield.

Higher rates make our debt investments more attractive to foreign buyers and increase the demand for the dollar. A strong dollar, in turn, makes goods and services produced by U.S. firms more expensive abroad. Large U.S. firms derive a meaningful part of their revenues form exports so it's easy to imagine how their sales may be affected by a stronger dollar.

The final market driver of late is the collapse in the price of oil. The price of a barrel of oil dropped below $30 this week. That's a price no one thought we'd ever see again. This rapid decline has put into question a whole host of issues. They range from the impact of political stability in the only functioning governments in the Middle East to the solvency of the high yield debt market.

We're less concerned with the political implications of low oil prices. Most of the oil producing nations are tenuous at best and while low oil prices make the situation worse, they are hardly the cause. More importantly for the stock market is how bad will the energy sector be hit and how will that effect the rest of the economy.

This question is what has directly led to the selloff this year. We acknowledge that there will be a lot of pain felt in the energy sector. There will also be many companies in the exploration business that won't survive this. Many of them have also borrowed a lot of money that won't get paid back and their banks and bondholders are going suffer losses. That is all true. What is also true is that significantly lower energy prices will have a huge positive impact on a much wider segment of the economy and corporate earnings.

We wrote about this last year and named just a few of the beneficiaries of low oil prices. The list is quite large and stretches across the whole economy. It may be a few quarters before Wall Street sees the impact show up in firms' quarterly earnings, but we have little doubt that it will. It's for this reason we feel that these low oil prices will be a net plus on the U.S. economy and the S&P 500 earnings. Therefore, we view this recent decline in stocks as temporary.

Looking ahead at 2016, we think the bigger driver of the markets will be the Federal Reserve. The timing and degree to which they increase rates will have a lot to say about the stock market. Our guess is that they'll take it slow. That being said, any increase is going to be a strong headwind for the stock market. More importantly, the inevitable uncertainty surrounding the Fed's moves alone will lead to a lot of volatility.

As far as the immediate drop in the market is concerned, this is not a long-term selloff because stocks are overvalued. Instead, we think these losses will reverse themselves in the coming weeks as oil prices stabilize. We do expect this to be another up and down year as higher earnings forecast battle rate increases. Our expectation is that this will be another mediocre year for stocks, but we are looking forward to higher rates for bondholders. It'll be interesting to see how the markets stand on their own without the Fed propping them as they have over the past seven years. That's the real question.

3rd Quarter 2015 Commentary

Volatility is King 
 So where do we begin?  The third quarter of 2015 was undoubtedly one that we all would like to forget.  In fact, we’ve fielded a lot of questions by anxious clients over the previous weeks wondering how we see the markets and the economy in the near future. Those are challenging questions to answer.  Investments of all types have struggled lately and the traditional safe-haven asset classes haven’t proven to be effective either.  In real terms, even cash is losing around 1.5% a year as evidenced by the fact that the Treasury has issued over a trillion dollars’ worth of one and three month Bills at an interest rate of 0%.

The depth of the quarter’s decline was very broad as the following table shows.  As bad as these numbers appear, they don’t even show the worst of it.  The S&P 500 was off as much as 11.4% near the end of August.  The other indices were down similarly around that time.  Alternative asset classes such as commodities suffered even worse losses.  The Dow Jones commodity index lost 12.7% for the quarter.  

These are very strange times and people are concerned that we’ll have another selloff like we saw in 2008.  While the general trend in the quarter has been sharply lower, it hasn’t been all down. Instead it’s been a whipsaw.  One day the news is perceived as highly discouraging and the next it’s not so bad.  This has led to massive money flows in and out of various asset classes and thus the seemingly endless triple digit swings in the Dow Industrial Average. 

The theme damaging to both the stock and bond markets (here and abroad) is uncertainty.  As of now, we have a number of major issues causing this heightened sense of uncertainty.  The market is uncertain as to when and if the Federal Reserve will start the process of interest rate normalization and begin raising interest rates in the future.   There is uncertainty given the economic slowdown in China which caused their stock market to swing wildly and eventually spilled over to stock markets around the globe. The collapsing oil and commodity prices is another sore spot and is a source of major uncertainty. 

The volatility has continued into this month (thankfully to the upside).  As of this writing, the Dow Industrial Average is down only 3.4%.  Our expectation remains that stocks will generally finish flat or with modest gains this year.  The fourth quarter is usually a pretty good quarter for stocks.  Since the early 1990s, the broad U.S. stock market, as measured by the Standard & Poor's 500 index, has declined in value in the fourth quarter only two times. The average gain in the 13 instances where stocks have risen in the final three months of the year is 6.3%.  If something similar holds true this year, the market would finish up about 1%.  With dividends, the total return would be around 3% - right in line with our expectations.

The Pursuit of Income is Sometimes a Bumpy Road
 In 2008, the S&P 500 lost over a third of its value.  It wasn’t until sometime in 2012 that the market fully recovered.  Stocks traded in 2009 at values similar to the height of the dot-com days at the end of 1999.  These are long periods of time that stocks essentially had zero return.  But inside of those periods, a lot of gains could actually be had.  To be a successful investor, you have to be able to buy and sell when it’s right for you, as opposed to something or someone else dictating when you make those trades.  Those outside forces could be anything from a margin call to needing to raise cash to pay your bills.  This is one reason income is so important to investors’ total return. 

Income gives you the predictability and liquidity that allows you to ride out bad markets.  This couldn’t be any truer than for retirees.  Also, having the ability to rebalance in good times and bad is key to taking advantage of wild market moves.  Portfolio income can keep you from having to sell into a bad market or build up and give you the liquidity to buy into one of these selloffs.  We actually used the sharp decline earlier this quarter to increase our equity holdings.  The funds we used were largely cash from interest and dividends that had built up. To generate this income, we have typically used high credit corporate, municipal and agency bonds for our fixed income allocations. But those are not an option at this time due to the extremely low yields in those markets.  In 2007, we could easily have bought “A” rated or higher corporate or agency bonds yielding around 7%.  Those bonds today would yield less than 2%.  It been this way for many years now and the ones we have owned are now paying off.  This has forced us, and all traditional bond investors, to look to alternative sources for income. 

We now hold a wide array of income producing securities in large percentages relative to our usual bond allocations. Examples would include high yield bonds, preferred stocks, MLPs, closed end funds, and bank loan funds.  These alternative income producing securities behave very differently from traditional bonds. Adding these alternatives to our portfolios have allowed us to keep up with our income requirements, but it has come at the cost of price volatility. 

In more normal times you’d hardly see any change in value in the fixed income portion of your portfolio from month to month.  That has not been the case lately as the prices for these alternatives have been affected by the same forces driving the stock market. This is especially true for high yield bonds and MLPs.  While we don’t like to see price pressure on these securities, the trade-off has been, and will continue to be, much higher income.  Our goal is to slowly work our way out of these positions and back into bonds but we have to wait until bond yields improve dramatically from here.  That could be years.  When all is said and done, though, we expect to sell these at prices around where we bought them and simply have our holding period return be based on the cash flow – somewhere around 7%.

Market Flash Part II

The wild ride continues today.  As I’m sure anyone with so much as a radio has heard, the Dow Industrial Average opened and promptly sold off almost 1100 points.  Regardless of who you are or what you do for a living, that’s not easy to watch.  After bottoming within a few minutes after the markets opened, the major indices quickly cut those losses significantly.  It’s still going to be a crazy day, and likely week, for stock investors.

This is all being driven by the topics we wrote about Friday but probably is worth diving into a little deeper today.  To start with, it’s worth saying that an investor should never trade in a volatile market like we’ve had today. Traders on the other hand, (good ones), love days like this. 

I would define stock investors as people who are buying equities based on multi-year trends and fundamental analysis.  They are reasonably expecting to see the share price change over time based on average increase in earnings (per share profits) of that stock or group of stocks (index) over their holding period.  For that expected increase to hold true, the average must be realized over at least several years. This is because funny things can happen in any given year or two, but seldom over longer periods of time. 

It is also important to understand what you’re buying when purchasing a share of stock.  The share price should represent the current value of all the future profits of that company.  If you’re buying an index, like we do, then it would be the future earnings of all the companies in that index.  For the share price to go up, the earnings must grow year over year.  The earnings growth of an index tends to be fairly predictable and this is why we view them as a safer way to invest than buying individual stocks.  Something unexpected can happen to one company that can impair their earnings for a long time. 

The biggest risk to stock investors usually comes from themselves.  Everyone knows that to make money in stocks you need to buy low and sell high.  However, most people’s natural instinct is to do just the opposite.  They see a big move in the markets and feel like they need to do something about it.  The reaction today would be to sell when the Dow was off 8 or 9 hundred points.  Two hours later the Dow is off 300.  By being “safe” they just lost a 3% spread. 

Days like this are for traders.  Traders love these markets.  To be successful, traders need volatility.  The more volatility the better their chance to profit.  It’s also fraught with the potential for losses.  But that’s the game traders signed up for.  To be a successful trader you want to look for stock prices that have become disconnected with reality or where there’s a big imbalance between buyers and sellers that you think will get corrected in the coming hours.  These opportunities are hard to find during normal trading days, but plentiful on days like this. 

So let’s look a little deeper into what’s driving the stock market lately.  We had mentioned Friday that the markets were taking their lead from the events in China.  The reason for this is that China wields a significant amount of influence over global trade due to their 1.4 billion person consumer base and $11.2 trillion GDP.  With those sort of numbers, it’s hard for businesses not to have some level of contact with them. 

As China’s influence has grown, so have the concerns about them.  We live in a very connected world and you can’t help who you’re competing with.  A U.S. auto manufacturer has to compete with a Chinese manufacturer for the same steel.  The same holds true for the Indian power plant buying coal or a Japanese firm buying semiconductors.  Firms also don’t have to sell directly into the Chinese market to be effected.  Their product may be one part of something else that is sold in China.  Chinese firms are out there bidding up prices on parts and materials that are used worldwide. 

One of the biggest concerns is the lack of transparency in the country.  China is ultimately a communist country with very loose standards when it comes to laws and regulations.  Economic news and statistics are carefully filtered by the government so no one is really sure if they can trust the official information released – assuming it even is released.  This makes getting at the truth a bit of a guessing game and analysts have become very creative at figuring out what is going on. 

The current drama is centered on the health of the Chinese consumer.  We know that individual debt has been rising in the country and that many Chinese investors have lost significant sums of money in their stock market this year.  We know the situation is bad because of the extraordinary measures their government has taken in an effort to reverse those losses.  In a true central planning way so common in communist regimes, the government has placed a number of trading restrictions and purchasing plans in place to stem the flow of losses in those markets.  This combined with a currency devaluation by their central bank have failed to turn the situation around.  Thus the global markets worry that things are spiraling out of control in China. 

Financial markets loath uncertainty and there is a lot to be uncertain about.  Thus we have a global selloff in stocks.  Our view is that the response is overblown.  While these concerns are legitimate, when you put the numbers to the possible outcomes, the economic impact to our economy doesn’t justify the level of panic we’re seeing.  This feels like a purely news driven event and not one based on the fundamentals.  History has shown that those types of selloffs tend to reverse themselves quickly.  This in no way looks like the last correction we had in 2009. 

Market Flash August 21, 2015

The Return of the Summer Swoon

By Charles Webb

It’s August.  That means it’s that traditional time of year when the stock market sells off and the financial news commentator’s favorite term, “market correction,” starts to get thrown around in earnest.  The reasons for the declines are seldom the same, but oddly the season seems to be connected somehow.  This year’s selloff has been brought to you by the Chinese. 

The world’s second largest and fastest growing major economy is beginning to show signs of age.  Just as trees don’t grow to the sky, national economies can’t exhibit rapid growth forever. They begin to reach maturity at some point.  China’s GDP is expected to reach $11.2 trillion this year.  That’s up from $10.4 trillion last year or up 6.8% (calculated in yuan), but well below the 2014 increase of 7.4% and 7.8% in 2013.  Their latest 2016 GDP forecast is looking for a 6.3% increase. 

Clearly, China’s size is making it difficult to sustain the growth rates we’ve seen in the previous years.  To be clear, 6.8% is still twice what a healthy and mature economy typically grows by, but it’s the trajectory that is catching people’s attention.  There have also been a number of questions raised in recent months about the health of several key segments of China’s economy.  Most notable of those are the number of bad loans sitting on the books of China’s banks.  How much? No one really knows what the truth is, but it’s probably big and could challenge their banking system. 

Experience has shown that this could have a substantial effect on China’s GDP for several years.  These concerns are reminiscent of our own debt crisis from a few years ago.  Large write-downs impair banks’ ability to lend, growth fueled by debt dries up and then a recession ensues.  There wouldn’t be the contagion to other countries like we had in 2008, but the impact would surely be felt around the world due to China’s trading influence. 

All of this leads to the question of what the impact on the earnings will be of all the big multinational companies that do business in China.  Once again, it’s hard to tell, but it could be significant.  A good example is Apple (AAPL).  China is a huge market for Apple and this uncertainty has driven their stock price down by almost 20% over the past month.  Apple has the largest market cap of all U.S. companies and thus is the biggest component of the major indices.  It’s easy to guess what a 20% decline in the largest member of an index will do to that index. 

Just as Apple’s business would be impacted by a Chinese slow down, others would be impacted, too.  And it’s not just companies that sell to the Chinese consumer but also companies that sell into their manufacturing base.  Materials and energy firms are taking the biggest hits this month.  As you can imagine, China has been a huge consumer of those materials and responsible for much of the prices of those goods.  A possible slowdown in their manufacturing base would obviously lead to a decline in raw material costs.  That’s not a bad thing for consumers but the companies that produce those materials also trade on the stock exchange. 

We’re also headed into September when the Federal Reserve has stated that it’s likely they’ll start raising rates.  If August continues to decline, they may hold off on that move.  That would be a powerful counter to the earnings concerns. 

What we are witnessing is the market trying to reprice these possible outcomes.  As with every large market move, the initial market reaction is to sell first and figure it out later.  There’s no telling where things will settle out, but you can be sure the reaction will always be overblown.  Our view is that while these concerns are legitimate, the market reaction is based on sentiment and not the fundamentals.  We still think that stocks will finish the year with slight gains.  As of this writing, the S&P 500 is down YTD about 4%.  It’s down a little over 7% in the past 3 months.  So a 3 or 4 point swing around breakeven is certainly not out of the ordinary and certainly something that can swing back the other direction within the coming 4 months. 

Today, (8/21/2015), the Dow Industrial Average has traded as low as -530 points.  That feels scary.  If our clients had to sell into this market, it would in fact be a big deal.  If you’re not in that position, however, this really isn’t so bad.  The market is basically where it was last October.  I don’t recall any of the news commentators worried then.  These days are far more relevant to stock and options traders.

This is just part of being a stock investor and also why we own bonds and other income producing securities that aren’t correlated with the stock market. In the meantime, we’ll sit back, collect our dividends and add to our positions at lower prices.  I doubt that in 5 years anyone will remember what the stock market did today any more than what the weather was. 

Rollover Rules You Need to Know

By: Lori Eason, CFP(R)

In my line of work, I am often asked about IRA rollovers.  Most commonly, clients have a 401k with a previous employer and are wondering what steps they need to take to remove their funds from the plan.  Starting in 2015, the IRS now follows a stricter interpretation of the 60-day IRA rollover rule.  I wanted to shed some light on this rule and what the changes mean for investors.

First off, there are two ways to move IRA money from one IRA to another IRA: indirectly and directly.  With indirect transfers, also known as 60-day rollovers, clients receive a check from their IRA made out to them.  They then have 60 days to redeposit the funds to another IRA and you can only have one of these per 12-month period.  The second way is a direct transfer, also known as a trustee to trustee transfer.  This is when funds move from one IRA to another without the client touching the money.  For example, if a check is the method of payment, the check is written by one custodian out to another custodian, i.e. Fidelity writes a check to Charles Schwab and Co.  This is always our recommended method of rollover and this method is not subject to the once-per-year rule.

 

Ever since IRAs have existed, there has been an IRS rule in place that allows IRA distributions to be rolled over within 60 days to avoid taxation.  Under the original rule, there could be one indirect IRA rollover per year, and the IRS interpreted this once-per-year rule to apply on an IRA-by-IRA basis.  Beginning in 2015, you can only make one indirect rollover form an IRA to another IRA in any 12-month period, regardless of the number of IRAs you own.

You may be wondering why the IRS decided to limit indirect rollovers to one per year.  I’m sure you won’t be surprised to find they did so because people figured out a way to abuse the system.  It is possible to use the rollover funds as a personal short-term loan, as long as the rollover contribution is made within 60 days.  Under the previous interpretation, an individual with several IRAs could potentially take a series of rollovers, allowing for an extended period of personal loans much longer than the 60 day period. 

This issue surfaced as a result of the recent ruling in Bobrow v. Commissioner.  Alvan Bobrow, a tax attorney, engaged in a series of sequential rollovers from separate IRAs to form an extended loan strategy.  His strategy involved two of his own IRAs and one of his wife’s.  He actually made a mistake and his final rollover took place after 61 days and was $25k short.  He claimed he had made a timely request and that he had requested the full $65k amount, but couldn’t produce any evidence for either.  Since the last rollover was not complete, it was reported as being partially taxable, but Bobrow disputed it.  I’m not sure which was the dumber move, the original “mistake” or disputing it which is what ultimately drew the IRS’ attention.  He could have just paid his tax bill and moved on.  As a tax attorney, he chose to represent himself in Tax Court.  The Tax Court ended up not only supporting the IRS’ decision, but also declared that since IRAs are aggregated together for income tax purposes, that aggregation should also apply for the once-per-year rollover rule as well. 

There are hefty penalties associated with violating the once-per-year rollover rule.  A second rollover made within a year could cause a taxable distribution plus a 10% penalty if the individual is under the age of 59 ½.  Also, this rollover will be considered an excess contribution subject to a 6% penalty for every year the ineligible rollover funds remain in the account.  It’s important to note that the year is a 12-month rolling period starting with the date of the distribution, not the calendar year.

Although 60-day rollovers are now riskier than in the past, these types of rollovers are easy to avoid by just sticking with direct, trustee to trustee rollovers, which is what we have always recommended.  There is no limit on the number of direct rollovers you can make in a year.  Keep in mind that it’s rarely a good idea to leave funds in a previous employer’s 401k.  While 401ks are a great benefit while you are employed as you can take advantage of salary deferrals and employer matching, they come with a very limited list of investment choices and generally high administrative expenses that are hidden within the funds.  When you’re no longer receiving the employee benefits, it’s time to roll the account over to an IRA.  Feel free to contact me if you’d like guidance on handling a 401k left behind with a former employer.

Second Quarter 2015 Commentary

Breaking News From 2010

Some things just never seem to change.  The recent weeks of volatility that have given us triple digit moves in the Dow Industrial Average have been exclusively driven by worries over Greek debt and the cohesion of the European monetary union.  That last sentence could have lead off our market commentary in 2009, 2010, 2011 or 2014.  Not only has Greece not dealt with their systemic deficit problems, but the EU can’t seem to come to terms with the fact that Greece won’t get its fiscal house in order. 

The recent stock market downturn in the U.S has been in response/sympathy to the broad market declines in Europe.  Euro zone markets have experienced sharp declines as the European Central Bank and IMF have been unsuccessful at negotiating repayment terms for the outstanding Greek debt.  Greece was due to make a substantial loan payment ($1.73b) to the IMF at the end of June, but of course didn’t have the funds necessary to fulfill that obligation.   In addition, Greece is running out of cash to meet its current payables.  Without further outside financial support, Greece will have no choice but to leave the European Union so it can reintroduce its own currency.  The Drachma may not be worth much, but at least they could print as much as they’d like.

In our opinion, a Greek exit is inevitable.  There surely has to be a point where the Germans will tire of bankrolling the Greeks.  It seems that most market participants are now coming to terms with that conclusion as well.  The larger question is the same as it has been for years - what will that mean for other weak European Union members?  This larger question is what’s really driving the current market fears. 

While that question is legitimate, we feel the current market reaction is entirely overblown.  There are significant differences today than there were five years ago.  Most notably, the European banking sector is in much better shape than it was in 2009.  Back then, Greek and other questionable sovereign debt was held throughout European banks and posed a real threat to their capital levels.  Years later, that debt, and Greek debt in particular, is held with the ECB.  The risk to the EU banking system doesn’t exist like it did in the past. 

For this reason, we believe this latest downturn will pass in the coming months.  If that were to be the case, we should see stock prices stabilize at their April levels.  Even then, that would only put the S&P 500 up 2.5-3% (before dividends) for the year.  As modest as those returns are, it would be in keeping with our expectations at the beginning of the year.  At that time, we felt that 2015 would finish with upper single digit returns with much of those gains occurring in the last quarter.

The U.S. stock market has strung together several consecutive years of gains (albeit from very depressed levels) and was in need of a pullback due to the valuations.  This year was likely to be the year earnings would need to catch up to stock prices.  The greatest impediment to that scenario was the strengthening dollar relative to the Euro.  Europe is our second largest export market so a stronger dollar makes our goods more expensive in their currency.  This then negatively translates into many U.S. companies’ earnings.

Depending on the day you’re reading this, to date the U.S. stock markets are largely flat.  Unlike last year, the mid and small cap sector of the stock market has performed better than the S&P 500.  The NASDAQ index has also out-performed large cap stocks.  Still these gains are modest at best. 

One other unknown hanging over the stock market is when will the Fed begin to raise rates?  They have stated that their preference is to start the process sooner than later.  At this point, the consensus is, barring any European contagion, it will be this fall.  Generally rate hikes are bad for the stock market, but this expectation has been built into the market for a while.  Higher rates will also be a needed relief for investors seeking income.  There’s a long way to go before we see anything that looks like normal interest rates, but we need to begin that move very soon.

In conclusion, while the Greek news had a big impact on the past quarter’s performance, ultimately we don’t think it will have led to anything by the end of the year.  Once there is a better understanding of the stronger dollar’s impact on GDP, we’ll probably see the Fed enact their first rate hike since the financial crisis began years ago.