Monthly Markets Memo - May 2015

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Equity Markets Perspective

The international markets led the equity markets for the month of April. The pickup in the European economy along with word that Chinese monetary policy is becoming more aggressive seemingly convinced investors that even better times are ahead in these economies and markets. Here in the U.S. some mixed economic numbers resulted in the large capitalization companies advancing slightly while the small companies declined. 

Global Economy Perspective

Around the world we continue to see central banks doing what they can to increase economic activity. Thirty countries have become more aggressive with their monetary policies so far this year. While it is still open for debate as to how much lower interest rates will contribute to an improved economy, in many developed areas we already have depression-like interest rates which seem to give equity investors confidence to maintain or increase their holdings.

We have continued to receive mixed economic numbers that show the U.S. making limited progress. The most recent job numbers were good enough to indicate that the economy continues to grow at a decent pace, but not enough to indicate a concern that the Fed will feel it needs to raise rates in a hurry. The GDP (Gross Domestic Product) number for the first quarter was almost flat, but the ISM (Institute for Supply Management) Non-Manufacturing Index has continued to post strong readings. This index tells us if the companies engaged in industries such as finance & insurance, health care and education are growing. Since this index hasn’t been around as long as the ISM Manufacturing index, economists tend to put less emphasis on it while attempting to determine if there is any looming potential change in the economy. However, it seems reasonable to take some comfort from the fact that service economy is doing well given that it is much less influenced by either the poor weather or the port stoppage both of which were reflected in the 1st quarter GDP numbers.

Europe however, has surprised a bit to the upside as lower oil prices and Euro currency has give companies there a competitive edge. However, it seems reasonable to believe that the European economy may have some hiccups along the way as the initial boost they have received from currency moves and oil pricing wear off.  China continues to show some slower economic numbers but China’s monetary system appears focused on doing its part to make sure their overall growth will continue. Their local stock markets have moved up fast due to anticipation that the economy appears to be supported more by consumers buying and less on the governments investment in infrastructure.

Looking Forward

Much has been made about when the U.S. Central bank (FED) will begin raising rates. While we also pay close attention to this and how it may affect our portfolios we think it will have less of an impact than some believe. We agree that it could cause some initial turmoil in both the equity and bond markets although it seems reasonable to think that it may be short-lived given that the FED seems to be willing to take extreme measures not to be the cause of a recession. Since it appears historically low interest rates are going to be with us for awhile we continue to believe an overweight allocation to equities still makes the most sense.

“If you don’t have time to do it right, when will you have time to do it over?" - John Wooden (basketball coach)

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