Quarterly Performance Update
Stocks Stalled, Bonds Declined
Second Quarter 2015
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Against a backdrop of modest economic gains, Federal Reserve (Fed) rate hike speculation, and Greece's debt crisis, investors endured a bumpy ride. Ultimately, the quarter’s ups and downs put the brakes on stock gains and shifted bond returns into reverse.
Investor optimism generally prevailed during April and May, largely due to better-than-expected first-quarter corporate earnings results and tempered expectations for Fed interest rate hikes. U.S. economic data were mixed, which led to increased speculation that the Fed would hold off raising interest rates until later in the year. These factors helped support stock gains in April and May. But investor sentiment shifted sharply in June. Greece's long-standing debt crisis finally reached a tipping point as bailout negotiations between Greece and the European Union broke down. A late-month shutdown of Greece's banking system and the nation's default on its $1.7 billion debt payment triggered losses throughout the global financial markets. Meanwhile, signs the U.S. economy was gathering steam prompted a fresh round of rate hike speculation, with September emerging as the consensus frontrunner for the Fed's first short-term rate hike. Despite a decline of -1.94% in June, U.S. stocks (S&P 500® Index) eked out a second-quarter total return of 0.28%, its 10th consecutive quarterly gain.
Similar to U.S. stocks, non-U.S. stocks generally plunged in June, leaving the broad developed (MSCI EAFE Index) and emerging market (MSCI Emerging Markets Index) indices with fractional second-quarter gains of 0.62% and 0.69%, respectively (in U.S. dollars). In a reversal from recent quarters, the U.S. dollar declined in value, which helped boost non-U.S. stock returns for U.S.-based investors. Local currency returns throughout Europe were generally negative.
Better economic data and its potential inflationary implications, combined with investor speculation surrounding the Fed's path to interest rate "normalization," drove longer-maturity U.S. Treasury yields higher. In addition, a sharp sell-off among European bonds, triggered initially by early signs of success for the eurozone's quantitative easing (QE) program and later by Greece's debt crisis, weighed on U.S. (and global) fixed-income returns. All investment-grade bond sectors declined, and the broad U.S. investment-grade bond market (Barclays U.S. Aggregate Bond Index) fell –1.68%. Non-U.S. bond market returns also declined, led by Europe. For unhedged U.S. investors, a weaker U.S. dollar lifted returns for non-U.S. bond markets.
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Source: Barclays Indices
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