June 2015 Financial Markets Summary
The most recent AAII Investor Sentiment Poll says only 27% of investors have a positive outlook for the stock market over the next six months. Just recently as February, that number was 47%. Sentiment is fickle, depending on what people hear and read from the media, and what may have happened to their own portfolio yesterday. While most investors have long-term goals, many lose sight of these as they are bombarded with almost constant negativity from television and radio talking heads. Long-term is put aside, replaced by “What have you done for me lately?”
A headline today on CNNMoney said “Gold headed for longest losing streak since March.” March? Long-term is not measured by years anymore, but by days! No wonder many investors are so fickle, and no wonder that some want to change their allocation almost monthly. We cannot stress enough how important it can be to establish an asset allocation based on an appropriate risk/reward profile and then try to stay the course, unless there are clear changes in lifestyle or cash flow needs.
International stocks continue to lead the way this year to-date. The EAFE Index (Europe, Australia & Far East) has been helped by the Far East segment, up more than 13%, while Europe has gained about 5% and Australia about 2%. The emerging market index has gained 5% this year on the strength of China, Russia and India. Brazil, the other large component of the index, is down more than 20%. Looking at individual sectors, biotechnology and health care continue their strong performances.
Much has been said about the recent strength of the U.S. dollar. While it does hurt our exports to some degree, it also helps to keep imported oil prices low. Credit Suisse estimates are that oil prices could weaken in the near-term before rising to the low $70s in the fourth quarter of the year. If a deal is executed with Iran, it will mean a flood of Iranian crude oil hitting world markets next year, putting even more downward pressure on energy prices.
As for the Fed and interest rates, two factors are significant. The first is very strong new housing construction numbers, and the second is an uptick in core inflation. When combined with continued low unemployment numbers, and signals the Fed is sending, we may indeed see a small increase in the Fed Funds Rate in the fourth quarter of this year. We believe the bond market is already beginning to discount this, with relatively flat returns year to-date.
As you peruse the numbers below, notice the similarity of 10-year returns for the Dow, the S&P 500, and the World Allocation. Our view is that the value of diversification and the value of patience are shown over the truly long-term time periods. In this case, a diversified mix achieved returns equal to an all-domestic stock index, with much less volatility and risk. Protect the money you might need to take from your portfolio over the next 3-5 years by keeping it in cash, CDs, or short-maturity bonds. And remember that today’s headlines and tomorrow’s reality are seldom the same.
|Asset Index Category||Category||Category||Category||10-Year|
|2015 To-Date||3 Months||2014||Average|
|Dow Jones Industrials – Large Cos||1.0%||-0.7%||7.5%||5.6%|
|S&P 500 Index – Large Companies||2.4%||0.1%||11.3%||5.9%|
|S&P 400 Index – Mid-Size Companies||5.0%||1.2%||8.2%||8.6%|
|Russell 2000 Index – Small Companies||3.5%||1.1%||3.5%||7.3%|
|MSCI EAFE Index – Developed Intl.||7.0%||0.7%||-4.9%||2.7%|
|MSCI EM Index – Emerging Markets||5.0%||1.4%||-4.6%||6.2%|
|Short-Term Domestic Bonds||1.0%||0.4%||1.1%||3.0%|
|Global Government Bonds||-1.3%||-1.5%||1.7%||4.0%|
|Morningstar Commodity Index||-1.0%||-1.7%||-24.4%||0.4%|
|Dow Jones U.S. Real Estate||-1.0%||-3.9%||27.7%||6.8%|
|World Allocation Global stocks, bonds, commodities||3.4%||0.4%||1.5%||5.9%|
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only. Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy. It is provided with the understanding that no fiduciary relationship exists because of this report. Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice. PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice. If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives. All rights reserved.