Our “summer vacation” edition reviews the investing scene at mid-year: Bond yields remain low, equities have performed reasonably well, and commodities have tumbled.
While the latest data from the Bureau of Economic Analysis revised GDP figures for the first quarter of 2015 and the prior three years, no such change will alter past financial market performance. Certainly, investors will incorporate the new economic information in their outlook and adjust prices accordingly. But as much of the country, including many of us here at AIER, embarks on summer vacations, it’s worth taking a brief look back at developments in securities markets over this year’s first half.
The benchmark 10-year Treasury note ended 2014 at a yield of 2.17 percent. The yield had drifted lower from late 2013, when it touched 3 percent. The declining trend continued into early January as signs of economic weakness became more apparent. The 10-year note’s yield hit a 2015 low late that month and has been on a roller-coaster ride trending higher, settling in a range of 2.2–2.5 percent for June that continued into July. With the Fed still pointing to a rate hike this year and a slow pace of tightening to reach its long-run goal, the question becomes, how high will yields go on longer-dated securities?
Precious metals, led by gold, surged as investors sought safety during the financial crisis, then continued to rally as central banks pursued quantitative easing, sparking fears of runaway inflation. Prices peaked in 2011, when gold reached a record, and have been generally falling since then. In the first seven months of 2015, precious metals prices dropped about 7.3 percent.
Energy prices have been particularly hard hit over the past year. Like precious metals, the combination of a strong dollar and weak global growth has weighed on energy prices. Add to that the decision by Saudi Arabia to increase output, protecting its market share (and starting a price war) against surging U.S. production amid advances in extraction technologies such as hydraulic fracturing, and the result is a plunge in crude oil values. Most of the initial slide came in last year’s second half, and prices bounced back a bit in the first few months of 2015. But more recently, oil has been falling again.
The first half of this year has seen equity markets grind higher, led by small and mid-cap stocks, which rose 3.5 percent and 3.4 percent, respectively. The large-cap Standard & Poor’s 500 Index trailed, producing a gain of just 0.2 percent. However, that performance masks a wide variation among different large-cap sectors. Utilities and energy stocks had the largest declines, falling 12.3 percent and 6 percent, respectively. Gains of 8.7 percent in health care and 6 percent in consumer discretionary stocks offset those losses. Overall, U.S. equities are fairly well supported by earnings growth, though valuations are not cheap by most measures. Looking ahead, a strengthening economy is still likely to provide further earnings growth and remain a positive support for equity prices.
Global equities in general have performed well in 2015. The Dow Jones Global Index and Dow Jones Global excluding the U.S. both climbed 2.4 percent this year through July. While there are exceptions, the majority of global markets have posted gains, even in China, where a sell-off that began in June has made headlines. Despite falling more than 30 percent, the China Shanghai index was still up 14 percent for the year through July. As in U.S. markets, an improvement in global economic growth is likely to help provide a foundation for future corporate earnings gains around the world.