The Cornerstone Investment Commentary: 2nd Quarter 2015
Against a backdrop of solid-if-uninspiring news on jobs, inflation and economic growth, the quarter’s over-hyped drama to predict future Federal Reserve actions was upstaged just before the curtain fell on June 30th by a Greek tragedy that left everyone unsatisfied by both the cast and the production itself.
It’s important to bear this in mind as markets sort out the Greek situation’s uncertainty in the coming weeks and months. The next acts in this story will understandably affect the citizens of Greece in a large way while having a much smaller impact on the forces shaping the global economy and your portfolio. And through May, before these forces were upstaged, they were on track for a 3% U.S. equity gain, an 8% foreign equity gain and fixed income/bond returns of 1.5%. In other words, a solid year had nearly reached its halfway point—but it was not to be. Instead, though, there may be a silver lining which accompanies June’s disappointing portfolio declines.
Though it has faded from the headlines recently, the bigger question involves the Fed and other central banks—though it’s not the childish guessing game of when an interest rate increase might occur. No, this bigger question asks whether their more serious error would be causing the economy to over- or under-accelerate before first ‘tapping-the-brakes.’ The bigger error is clearly to ‘tap’ too soon, though many of the loudest voices say still otherwise, because the Fed knows its ability to jump-start the economy is almost entirely determined by how much it can lower interest rates to fight (the next) recession.
The more the Federal Reserve allows the economy to grow now (with inflation perhaps hitting 2-3%), the more it will likely have to raise rates when it does apply the brakes—perhaps all the way back to rates at our 3-4% (!) historical norm. This would give the Fed far more ability to stimulate the economy with rate cuts when this recovery truly does run out of steam. Fortunately, a growing chorus of voices (including a June statement in The Economist) now speaks these lines with conviction. How does this relate to what’s afoot in Greece? That situation, along with a slowdown in China, will definitely not accelerate global economic growth. And these developments may helpfully delay the onset of interest rate increases until economic growth in the rest of the world has gathered a bit more steam.
With this bigger picture perspective clearly in our sights—and while watching these more immediate uncertainties closely—we believe your portfolio is well-positioned given today’s market valuation levels, interest rates and inflation. Should any of this change, we will certainly act accordingly and be in touch.
As always, we both welcome and look forward to any thoughts or questions you may have. And we wish you a most enjoyable summer and thank you sincerely for the continuing opportunity to work together.