My F&M

Market Commentary 2nd Quarter 2015

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Domestic stock and bond markets were essentially flat in the first half of this year as investors continue to sort out prospects for higher interest rates, Greek and Puerto Rican defaults, and what has now become a bear market in Chinese stocks.  While developed international stocks were virtually flat in the second quarter, they have been the best performing asset class this year with a total return for EAFE (Europe, Australia and Far East stock index) of 5.5%.  Recall that, last year, this was the worst performing asset class.  On the other hand, last year’s best performing asset class (REITs - real estate investment trusts) has been this year’s worst performer with a total return of -5.4%.  Such reversals in performance usually catch most investors by surprise, which is why broad diversification and disciplined rebalancing (hallmarks of our investment strategy) add value over time.  

Our strategy emphasizes dividends, because in the long run, dividend-paying stocks have produced significantly better returns than non-dividend payers.  However, there are periods, as we have experienced over the past two and a half years, when dividend-paying stocks have underperformed.  In fact, stocks that do not pay dividends (which we generally avoid) have outperformed dividend-paying stocks (on which we focus) by more than 6% year-to-date, creating significant headwinds for our investment strategy.  We take comfort that these periods have historically been followed by sharp reversals.  

Economic growth has continued at an anemic pace, and inflation has yet to become an issue with the CPI (Consumer Price Index) nearly flat over the past 12 months.  

Investment opportunities have not changed much from the first quarter or even from the end of last year.  Low dividend yields and high valuations leave stocks with generally below-average prospects for long-term returns (with emerging market stocks looking like the best of the lot).  Bond yields are very low (the 10-year Treasury note only yielded 2.3% at quarter-end).  Cash yields remain near zero.  In light of these market conditions, we have been expanding your holdings in market risk hedges by adding truly non-correlated positions.  Of course, we continue to execute our process of rebalancing your portfolio with discipline.