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Market Commentary 06/30/2015

It’s a Small World After All

The world indeed feels like a small, interconnected place after all. The simple chorus of the iconic theme park ride, which celebrated its fiftieth anniversary last year, seems as true now as ever. Like long-suffering parents on a Disneyland vacation, investors can’t escape the news from across the globe, hearing practically non-stop about what’s going on in Greece, China and Puerto Rico. Many ask why the finances of a country the size of Alabama with an economy smaller than Miami even matter to their portfolios.

When we look at the volatility over the quarter we see that the markets gyrated each time Greece was mentioned in the news. The quarterly numbers reflect a market that started strong then pulled back from record levels set in May. Overall the S&P 500 gained just .3% during the quarter while the Russell 2000, a measure of small company stocks, eked out .4%. Beginning the year, European markets were far ahead of the US but their markets too were tested as fears of a potential Greek tragedy loomed at quarter end. Even with an aggressive stimulus program, improving business sentiment and strengthening activity in manufacturing, European markets generally posted negative returns for the quarter. Looking beyond the quarterly numbers, European markets year to date were still up 6.40% due to the European Central Bank (ECB) monetary stimulus, which overshadowed the Greece news. More broadly though, the international markets were modestly higher with the MSCI EAFE (world index) posting a 1.5% gain for the quarter.

What about Greece made the markets so afraid? After all, financial problems are nothing new to the Greek government, which has been in default 46% of the time since its independence from the Ottoman Empire in 1829. The answer to this question may be surprising given the news coverage, but the goings-on in Greece have little direct impact on any of the stocks in our portfolios. Though Greece was the headline, the market’s reaction centered less on Greece itself and more on the uncertainty of what could happen if other heavily indebted European nations would miss or stop making payments on their debt. Speculation on the part of investors or media sources always spools volatility. The Greek economy represents less than 2% of the Eurozone’s total output, yet many market watchers see Greece as the canary in the coal mine. In 2012 Greece’s private sector debt was restructured with the value reduced by 75%. As a result, 80% of Greece’s government debt is now held by European institutions, with the European Financial Stability Fund (EFSF) holding the majority. Though Greece’s debt totaled a whopping 177% of their GDP in 2014, the greater issue is not how much debt they have but how they and the other countries in the Eurozone handle the debt. This, and not the Greek debt itself, is the primary challenge facing the Eurozone nations. Greece and other nations with very high debt loads such as Portugal, Italy and Ireland are married to relatively strong economies such as Germany. Traditional options for managing debt become limited with none being particularly attractive—as the Greeks have found out with their austerity programs. While many expect these issues will eventually be resolved without a “Grexit”, the European Union is also working on procedures for nations to exit the Eurozone as no such process has been concretized today. For now, though, Greece has been given another lifeline.

The news from Europe overshadowed a considerable amount of other market shaping news, both positive and negative, throughout the quarter. We saw a sharp plunge in Chinese stocks and a near default in Puerto Rico’s municipal debt, events which have significant potential consequences for investors. The Chinese market, after years of strong stock gains on the back of double digit economic growth, is paring returns as the robust growth in China slows to mere single digit levels. The sharp decline in Chinese stock prices has also been worsened by margin calls, which have forced investors to sell shares at declining prices. What we are seeing with Puerto Rico’s debt crisis, meanwhile, has some similarities to Greece: the government has gotten extended far beyond what it can support. Puerto Rico is a relatively small economy but has municipal debt issued that represents nearly 2% of the overall US municipal debt market. As an investor, it can be hard to limit exposure to these areas, but it is not impossible. We believe these two examples, among others, strengthen the case for ongoing active investment management.

Despite the negative headlines there was also plenty of good news that came from around the globe this quarter. Energy prices, while volatile, remain substantially lower than they were last summer. US unemployment is down to 5.3% suggesting full employment, interest rates remain at decade low levels and wages are starting to rise. This all goes a long way to boost our consumer-driven economy and continues to drive a US recovery. European and Asian stocks have been very volatile but we see the ECB is now in the very early stages of their version of quantitative easing. In January 2015, the ECB announced a huge expansion of its asset purchase program committing to spend an average of 60Billion Euro per month, which is expected to boost investment and consumer spending, further underscoring the ECB’s commitment to driving growth.

We believe portfolio managers that focus on quality and are selective in their investments will be positioned to outperform their respective indices over time. A balanced asset allocation, when in line with an investor’s overall objectives, is proven to help weather the volatility. We live in a globalized economy where we see that the financial fate of one country may be felt by others. Ripples will be felt in many sectors and volatility should be expected as we go into the next half of 2015. More importantly, this means there are opportunities that are not constrained by borders.

We are constantly looking for ways to take advantage of these opportunities through the tactical changes that we make from time to time. We appreciate your continued trust and confidence. We always look forward to your questions and strive to help minimize your concerns. Enjoy the remainder of your summer with friends and family.


Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager                                                            Asset Manager





JP Morgan 3Q 2015 Guide to the Markets; Charles Schwab, “8 Things You Need to Know About the Greek Debt Crisis” June 30, 2015; Wall Street Journal, “No Easy Way Forward for Uncertain Markets” July 1, 2015; Deutsche Asset & Wealth Management “Xpert Insights” July 8, 2015; Charles Schwab, “Market Perspective: Not Too Hot…” June 26, 2015; Morningstar.com, Fund Category Returns

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