Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Second Quarter of 2015. The excerpt is posted here for the benefit of our blog subscribers.
Equity market performance was mixed in the second quarter, as signs of improving economic growth were offset by concerns over the continuing Greek debt crisis and fears of rising interest rates. US stocks, as measured by the S&P 500 index, were largely flat on the quarter, although their scant 0.3% gain allowed the index to claim its tenth consecutive quarter of positive return, the longest such run for US stocks since 1998. With two consecutive quarters of small gains in 2015, the year-to-date return for the S&P 500 stands at a modest 1.2%.
The technology-heavy Nasdaq Composite index was one of the few bright spots for US markets (up 2.0%), briefly surpassing its previous all-time high set in March 2000 at the peak of the dot-com bubble. Other top performing US sectors included health care (up 2.8%), consumer discretionary (up 1.9%), financial services (up 1.7%), and telecommunications (up 1.6%). The strong gains in health care were largely driven by a variety of mergers and acquisitions activity, as well as the Supreme Court’s ruling upholding subsidies under the Affordable Care Act. The worst performing sector was the interest-rate-sensitive utilities sector (down 5.8%), as investors grew skittish about the potential for future interest rate hikes.
Although US markets seemed to be running out of steam by quarter-end, it’s not clear if this is a short-term lull or the start of a new trend. Market volatility rose slightly near quarter-end amid heightened concerns for a potential “Grexit” (an exit of Greece from the euro currency), however the CBOE Volatility Index finished the quarter at 18.2, still a bit below historical averages and suggesting investors are largely maintaining a level-headed approach to the international drama.
Our general view is that while the situation in Greece bears close monitoring and is quite perilous for the average Greek citizen, we think it is unlikely to have large long-term repercussions for US, or even world markets. We currently see the risk of contagion (i.e. Greece’s woes spreading to Italy, Ireland, Spain, et. al.) to be low. Keep in mind that Greece comprises a mere 0.02% of the world’s stock market capitalization, and both investors and foreign governments have had considerable time to prepare for a variety of scenarios. As this is written, Greek Prime Minister Tsipras has agreed to creditors’ terms for a third bailout, which would enable Greece to remain in the euro bloc and reopen its banks. However, it is not clear whether the Greek parliament will ratify the agreement. In any case, this is a highly fluid situation, with many twists and turns surely still to come.
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