As the first quarter of 2015 ends, much uncertainty surrounds the global economic data. We believe that in the US, the recovery is going to last. Even if consumer spending was lower during the first quarter, we expect it to pick up. In Europe, some point to low inflation as a cause for concern. It is important to note, though, that leading indicators suggest the worst in Europe may be in the past.
There’s also uncertainty about the path of central bank policy. Fifteen of the 17 members of the Federal Open Market Committee (FOMC) indicate that an interest rate hike will likely occur in 2015. It doesn’t make sense for the key US overnight interest rate to be near zero much longer. Meanwhile, the European Central Bank (ECB) commenced a new asset purchase program during the quarter and negative interest rates pervade much of the European bond market. The Fed is tightening, while the ECB is easing.
For investors, this has meant a stronger US dollar, in fact, the last three quarters have seen the strongest appreciation of the dollar in 25 years. In part, this is due to the attractiveness of dollar denominated holdings when Europe is plagued by low and, in some cases, negative bond yields. A stronger dollar also brings weaker commodity prices (e.g., oil). A further contributing factor is somewhat slower growth in the developing world, which is now 50% of GDP. Geopolitical forces will also continue to be in the headlines and commodity prices will be volatile.
Our message is to “stay the course.” Our portfolios are diversified and as a firm we are in a position to act quickly in the cash market place when dislocations and opportunities occur. We do not feel there is compelling reason to alter overall objectives. Of course we are looking at individual strategies and holdings and making changes where appropriate. We believe over the next year the US equity market will continue to show positive returns, and opportunities will still prevail in the global fixed income area as there will be no significant surprises in inflationary trends.
My best wishes for the coming months.