Thursday, July 2, 2015

2nd Quarter Review

Stocks looked tired in the 2nd quarter as they fought off challenges on a number of fronts.

The continued preoccupation with the Federal Reserve's potential timing of interest rate hikes was only one of several concerns.  First, coming into the quarter, investors once again worried about the economy being on shaky ground as the 1st quarter saw GDP contract due to a variety of other factors including terrible weather.  However, as Q2 moved on we saw signs of the economy firming as the weather improved, the employment market picked up and housing appeared to steady.  This led to some speculation that the Fed could act to raise rates as early as June.  However, Chair Yellen and co. cited the year's early economic weakness as a reason to not yet move but also rearranged some of the language in their statements.  While they have certainly left the door open for an initial hike later in 2015, it's now clear they will be very deliberate with regard to the pacing of subsequent hikes.

As the quarter moved on, Europe came back into focus.  While a number of its economies and markets appeared to benefitting from the European Central Bank's latest quantitative easing efforts, Greece's debt problems became more and more of a concern until ultimately coming to a head in the last week of the quarter.

All of this news helped to keep the majority of US stocks in the incredibly narrow range in which they've traded for most of the year.  The S&P 500 and Russell 2000 finished essentially flat for the quarter while the Nasdaq was able to post an admirable 1.75% gain.

On a year to date basis, the story is similar for the S&P as it finished the first half of the year almost exactly where it started.  Meanwhile, the Russell 2000 and Nasdaq have continued to maintain pole position in the 2015 relative strength race.

On a sector basis, health care, cyclicals and financials lead the way in Q2 while utilities, energy and industrials held the broader market back.

And it's pretty much the same story when expanded to a year to date view with health care and cyclicals being the clear leaders to the upside while energy and utilities lag well behind.

Looking internationally, the Chinese markets have gone on a heck of a ride so far in 2015. The Shanghai stock exchange roared higher during the 2nd quarter until peaking on June 12th.  While still up handsomely on the year, the index has tumbled nearly 25% over the last 3 weeks.  Similarly, Russian stocks have logged impressive gains so far in 2015.  Predictably, Greek stocks have struggled majorly as the country/economy has fallen into a depression.

Looking outside of stocks, long-dated bonds and commodities have lagged mightily on the year.  The TLT (iShares 20-year treasury) is down more than 5% in 2015 on the back of rising rate worries.  While the overall commodities complex has been severely weighed down by the plunge in oil/energy prices earlier in the year.  Elsewhere, short-maturity bonds and municipals, while not logging gains, have at least managed to stay afloat.  And though the US Dollar has come off its highs it's still generated a healthy year to date return.

On to the 2nd half....

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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