1st Quarter Market Analysis - April 2015
DIS and DAT - 1st Quarter Market Analysis - April 2015
The ultimate authority must always rest with the individual's own reason and critical analysis.
Dalai Lama
Performance review by the numbers
We begin by taking a look at past performance of some broad areas, which is not indicative of future results.
Index Year-to-Date 1 year 5 year(annualized)
SP 500 0.95% 12.73% 14.47%
SP 500 Value (0.69)% 9.12% 13.14%
SP 500 Growth 2.47% 16.11% 15.77%
Russell 2000 Growth 6.63% 12.06% 16.60%
Russell 2000 Value 1.98% 4.43% 12.54%
Aggregate Bond 1.61% 5.72% 4.41%
MSCI EAFE 4.88% (0.92)% 6.16%
Gold (1.02)% (8.11)% 1.29%
XOM (7.31)% (10.16)% 7.51%
Commodities (5.95)% (27.18)% (5.95)%
SOURCE: Yahoo Finance, Morningstar.com – As of 3/31/2015
Fundamental review
Now we turn to a review of the general investment fundamentals. According to the Bureau of Labor Statistics (www.bls.gov) the inflation rate ended at 1.7% on the core, and the top line fell to -0.1% for the last year, mostly due to the 18.8% decline in energy. The five year average is 1.61% on the core. For purposes of analysis, using 2.0% inflation seems reasonable. While the Fed has not had much luck creating inflation, fighting deflation is ultimately their end goal. From Value line selection and opinion (www.valueline.com) we find 90 day T-bill yields are 0.02%, which is the same as a year ago. “A” rated industrial corporate bonds yield 3.78%, which is down from a year ago of 4.52%. In our view, the required return on equity would be about 8.0% to be worth book value, using the 2% inflation. JP Morgan guide to the markets reports the SP500 index of stocks ended with a return on equity of 14.5%, and a price to book value of 2.8. As of March 31st, the Real Earnings Yield for SP500 sits at 3.9%, while it’s down from 4.2% a year ago, the spread over 10 year treasuries has actually widened to 1.96%, compared to 1.48%, as the bond market attracted more people looking for “safety.”
Thoughts and comments on asset classes
As the calendar year turned, the U.S. equity markets continued to sing the same tune that began in the 4th Quarter. Small Caps outperformed Large Caps, with Small Caps advancing 4.3%, while SP500 was up 1.0%. Prior to the 4th Quarter of 2014, the last quarterly outperformance by Small Caps was all the way back in Q3 of 2013. This looks to be in direct correlation to the recent parabolic move of the U.S. Dollar, which began at the end of the 3rd quarter last year. U.S. Large Cap Companies get approximately half of their revenues and earnings overseas, so the rising dollar negatively impacts both.
Speaking of overseas, The International Developed Markets rose 4.9% outpacing U.S. Large Caps for the first time since Q3 of 2013. Also, with the 5+ years of relative underperformance, International may be a place to start when searching for investment value, which is what our internal model is also suggesting.
The 10 year treasury yield had a volatile start to 2015. After starting the year at 2.17%, it fell sharply to the yields not seen in 2 years, only to shoot up to 2.25% in the beginning of March. Yields then fell back to end the quarter at 1.94%. Based on the inflation, this gives the 10 year treasury a real yield of 0.25%. In our opinion, the 10 year treasury bonds should definitely be avoided as an investment. Any uptick in inflation would wipe out any real investment returns. With respect to the entire Fixed Income Sector, High Yield Bonds led the way as investors continue to stretch for yields. We strongly recommend NOT stretching for yield in the funds allocated toward short and medium term objectives.
The commodities continue to be the whipping boy of all Asset Classes losing another 5.95% to start 2015. This comes after being down 7% and 9.5%, in 2014 and 2013, respectively. While there are many factors attributing to the poor performance such as oil supply , strong dollar, lower inflation expectations, and slowing global growth worries to name a few, commodities might be primed to bounce back if these headwinds fade.
We appreciate your time and the opportunity to share with you our investment thoughts. We strive with our communications to add to our clients understanding of our investment management thoughts, which we hope will help improve longer term performance. For questions and comments feel free to contact us at 1-866-748-0687 or AI@advisors.investments.
We appreciate your time and will talk to you again soon,
Reggie McFadden, CFA
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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 the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.
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Performance Disclosures
All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. (JPM: Guide to the Markets)
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index (JPM: Guide to the Markets)
The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (JPM: Guide to the Markets)
The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. (JPM: Guide to the Markets)
The MSCI®EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. (JPM: Guide to the Markets)
The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. (JPM: Guide to the Markets)
The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. (JPM: Guide to the Markets)
The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. (Ishares)
XOM is the common stock symbol of ExxonMobil Corporation that trades on the exchange
