Eric J. Freedman
CAPTRUST Chief Investment Officer
Following 2014’s strong gains across domestic asset classes while international asset classes lagged, 2015 begins with the opposite effect.
The U.S. stock and bond markets delivered positive total returns in this year’s first quarter. The U.S. stock-focused S&P 500 gained 1 percent and the Barclays Capital Aggregate Bond Index rose 1.6 percent. International developed stocks (as measured by the MSCI EAFE Index) rallied 5 percent through March, following a 4.5 percent decline in 2014. Emerging market stocks rose 2.3 percent in the first quarter, shrugging off last year’s 1.8 percent loss. Public real estate followed up a stellar 2014 with the MSCI U.S. REIT Index closing up 4.8 percent in the first quarter. Commodities continued their downward slide, dropping almost 6 percent during the first quarter.
Central bank activity remains the primary focus for investors, and the first quarter provided several consideration points. First, European Central Bank President Mario Draghi announced a $1.3 trillion stimulus program through October 2016, a significant capital commitment as Europe looks to fight off four years of economic stagnation. Japan also remains pro-growth, approaching almost two years since it enacted a set of policies resulting in $2.4 trillion of asset purchases. The U.S. Federal Reserve has been an outlier, ceasing its asset purchase program in October of 2014. Fed members have spent the early part of 2015 debating when it may raise interest rates, which have been near zero since December of 2008. A friendlier central bank environment outside of the U.S. may have contributed to improved performance for international stocks.
The U.S. Federal Reserve’s decision on when to raise interest rates has implications for financial market instruments ranging from bonds to currencies to stocks, but weakening growth prospects may challenge its timing. The U.S. has seen dampening of corporate profits, hiring, and consumer demand, although poor winter weather may be the cause. Europe is showing marginal recovery signs, but remains below its growth potential. Similarly, central bank activities may mask Japanese growth, and China appears to be having a difficult transition to a more consumer-oriented economy. Latin America is feeling the pinch of commodity price declines, leaving few regions with burgeoning economies.
We continue to see the glass half full with respect to the global economy’s prospects. Yet, with the U.S. potentially transitioning to more restrictive monetary policy later this year, investors have plenty to consider. While the U.S. economy has underlying momentum, without help from China, Japan, and Europe, the U.S. will not be able to carry the global economy alone.
Asset prices can diverge from economic prospects, but parts of the global stock and bond markets will need increased consumer demand to justify their moves toward historically expensive levels. This year promises to deliver developments that will shape the investment landscape, and we will keep you posted with our views and perspectives.