Markets ended the first quarter about where they started, but the ride was considerably bumpier than we’ve seen in the past few quarters. The two major culprits driving uncertainty were the Fed’s ruminations on a rate increase and escalating geopolitical strife.
The circumstances in the Middle East are increasingly worrisome. The rapid spread of instability in Yemen (until recently a key strategic US location), escalating Israeli/US tensions, Saudi Arabia’s military mobilization, and the continued expansion of ISIS all conspired to roil capital markets around the globe. ISIS actually identified targeted military personnel in ten US cities. These events bear watching as they continue to unfold.
The Fed’s continued hemming and hawing on a rate increase added to the bumpiness of stock and bond markets in the US. At this point, it’s difficult to imagine the markets haven’t already factored in a rate bump sometime this year. This might produce some hiccups, but they will likely be temporary as the US and international economies continue to expand.
Turning our attention to the markets themselves, the broad US stock market essentially marked time for the quarter, while international stocks advanced due to the dollar weakening a bit. (For those who thought they should pile out of international stocks and into US stocks based on last year’s results, we won’t say we told you so, but we told you so.) Bond markets were up slightly for the quarter as interest rates remained unchanged. And commodities were flat to down slightly as oil weighed on overall natural resources prices. As a result, broadly diversified balanced portfolios were flat to slightly up for the quarter.
As we roll into the second quarter of the year, the key drivers to watch will be corporate earnings and economic signs of continued expansion, the unfolding drama in the Middle East, and the Fed’s position on interest rates. As always, this uncertainty can be effectively managed by remaining broadly diversified and using tactical managers to help take advantage of temporary dislocations. We’ll report back to you on these vital signs at mid-year. In the meantime, don’t hesitate to call us with any questions.