Market Commentary: Market Recap

    Market Update for the Quarter Ending June 30, 2015

    World markets hit by political uncertainty
    June was difficult for U.S. equity markets, with the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq down 1.94 percent, 2.06 percent, and 1.64 percent, respectively. Overall, markets were flat, but they dropped precipitously at month-end as the Greek crisis worsened.

    For the quarter, results were better but lackluster. The S&P 500 gained 0.28 percent, though the Dow lost 0.29 percent. The Nasdaq performed best, up 1.75 percent. For the Dow, the month-end decline erased gains for the quarter and most of the year, while the S&P 500 and Nasdaq continued to post gains for the quarter and year-to-date.

    A major contributor to poor market performance was the announcement of a further decline in expected corporate earnings. Moreover, technical factors weakened during June. Although all three major U.S. indices closed the month above their 200-day moving averages, the sharp decline at month-end brought them closer to that level, with the Dow dropping below its 200-day moving average before recovering.

    Developed international markets declined more than U.S. indices for the month but did better for the quarter. The MSCI EAFE Index was down 2.83 percent in June though up 0.62 percent for the quarter and up 5.52 percent year-to-date. Emerging markets, represented by the MSCI Emerging Markets Index, lost 3.18 percent in June, leading to a 0.24-percent decline for the quarter. Both international indices dropped below their 200-day moving averages at month-end.

    The Barclays Capital U.S. Aggregate Bond Index lost 1.09 percent for the month. Results in other fixed income sectors showed varying levels of weakness (see Figure 1).

    The decline in the Barclays Capital High Yield Municipal Index was largely due to the surprise announcement at month-end by Puerto Rico’s governor, declaring that the island couldn’t pay its $72 billion public debt load without dramatic restructuring.

    U.S. economic recovery continues
    U.S. economic news during the quarter was quite strong. The annual rate of job growth has been above 3 million jobs for the past six months, a level last seen in May 2000. This has driven the unemployment rate down to 5.3 percent, and wage growth seems to be responding. In addition, consumer confidence in May was at the second highest level since January 2007, and personal spending growth was at its highest level in six years. Other economic indicators at multiyear highs were housing and vehicle sales.

    Not all the news, however, was good. Manufacturing growth remains weak, although positive, and the energy sector continues to downsize in response to low oil prices.

    International risks return to the forefront
    The principal risks for the second quarter were international. Negotiations between Greece and its creditors broke down entirely at June’s end, which led to significant market downturns around the world. Still, overall, market reaction has been relatively modest thus far. Looking forward, a deal remains possible, and even if Greece were to exit the eurozone, the systemic damage would likely be contained.

    Other international news worried investors. Chinese stock markets moved into bear territory at month-end, with substantial declines in Shanghai, reflecting a continued slowdown of China’s economy.

    Concern is appropriate, but the big picture remains positive
    Economic fundamentals are strong in the U.S. and improving in Europe. Moreover, both the U.S. and the world at large are better prepared to weather challenges than in recent years.

    We could see further turbulence, particularly in international markets, but at this point it appears that this would represent a normal adjustment to changing conditions. Even a larger correction would be normal in the grand scheme of things. We remain confident in the U.S. economy, our excellent positioning in the world, and the strength of our financial markets. We believe that a well-diversified portfolio with regular rebalancing is still the best way to meet financial goals over time.

    All information according to Bloomberg, unless stated otherwise.

    Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital High Yield Municipal Index measures the performance of long-term tax exempt bond market, including high-yield municipal bonds only.

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