Market Analysis - July 2015

James Pope |

DIS and DAT - Market Analysis - July 2015

The ultimate authority must always rest with the individual's own reason and critical analysis.
Dalai Lama

 Performance review by the numbers

We begin by taking a look at past performance of some broad areas, which is not indicative of future results.

Index                          Year-to-Date                     1 year                   5 year(annualized)

SP 500                                   1.23%                    7.42%                    17.25%

SP 500 Value                      (0.45)%                     4.57%                    16.01%

SP 500 Growth                     2.80%                    10.07%                  18.65%

Russell 2000 Growth            8.74%                    12.34%                  19.33%

Russell 2000 Value               0.76%                     0.78%                   14.81%

Aggregate Bond                  (0.10)%                    1.86%                     3.35%

MSCI EAFE                          5.52%                    (4.22)%                   9.54%

Gold                                     (2.36)%                 (10.95)%                (1.23)%

XOM                                    (8.47)%                 (14.58)%                10.66%

Commodities                        (0.21)%                 (36.81)%                (4.33)%

SOURCE: Yahoo Finance, – As of 6/30/2015


This too shall pass

                In this section a few news items which have moved markets will be discussed. As time passes, hopefully this section will serve as a reminder that the world keeps spinning as we try avoiding the “chicken little” thought pattern.  In the second quarter of 2015, Saudi Arabia continued to hold supply of oil extremely high keeping oil prices near multi year lows. This low price is causing many high cost oil producers to experience severe disruption to their profitability.  Another global concern has been the debt and solvency of Greece.  As stated before, Greece has been in trouble many times in the past.  The Greece headline is likely to go in and out for years to come, but it’s not likely the end of civilization.  Back in the states, the Market news surrounds the Federal Reserve and the issue of interest rates.  Despite all the talk of increasing interest rates, the ten year treasury hit 1.6% in late January 2015. Since that time it has shot up to around 2.4%.

DIS and DAT Summary

                We would like to remind readers of our soon to be released Dis and Dat piece titled “Qlac Investment”.  The discussion revolves around a recent change made to tax regulations that could impact retirees.  Look for it shortly to announce our new website.

Fundamental review

                Now we turn to a review of the general investment fundamentals.  According to the Bureau of Labor Statistics ( the inflation rate ended at 1.7% on the core, and the top line was unchanged for the last year, mostly due to the 16.3% decline in energy. The five year average is 1.73% on the core.  For purposes of analysis, using 2.0% inflation seems reasonable, given the Federal Reserve’s desire and related actions of reflation. While the Fed has not had much luck creating inflation, that is ultimately their end goal. From Value line selection and opinion ( we find 90 day T-bill yields are 0.01%, which is slightly lower than the 0.02% a year ago.  “A” rated industrial corporate bonds yield rose to 4.45%, which is up from 3.74% and 4.36%, 3 months and 1 year ago, respectively.  In our view, the required return on equity would be about 8.0% to be worth book value, using the 2% inflation.  JP Morgan guide to the markets reports the SP500 index of stocks ended with a return on equity of 17.6%, and a price to book value of 2.9, meaning stocks are basically fairly valued.  As of June 30th, SP500 has an earnings yield of 6.1% and the 10 year treasury yields 2.4%, which is basically where it was June 30th 2014, showing still a preference of stocks versus bonds on a comparison basis.

Thoughts and comments on asset classes

                As we sit here, half way through 2015, investment returns across asset classes have been somewhat muted, with the lone bright spots being International Developed Markets and U.S. small caps. SP500 enters the second half of 2015 with a gain of 1.2% and bonds are slightly negative. Commodities, particularly energy, continue to be volatile. And while the commodity market had a little bit of a relief rally in Q2, still sit negative year to date.

Taking a more in depth look at U.S. equities, the interest rate sensitive sectors continue to be hit by the rising 10 year yield. Utilities are the worst performing sector now down 10.67% for 2015, followed by REIT’s losing 5.4%. Between an increase in borrowing costs for these levered sectors and risk free yields inching up, you can see why utilities and REIT’s performed poorly.  When looking at the best performing sectors, the momentum continues to be favorable for Health Care and Consumer Discretionary as they added to their yearly gains to finish the first half up to 9.56% and 6.8% respectively.

                The International Developed Markets continue to be led by Japan and Europe. Japan had another strong quarter to end the first half of 2015 with a 16% gain. While Europe faltered a little in Q2 surrounding the Greek debt crisis, it still sits with a 13.4% gain in 2015.

                The Bond market, when gauged by the U.S. Aggregate Index, erased all of 2015 gains in Q2, as the market begins to price in the Fed raising rates at some point in 2015. The bright spots remain Junk Bonds and Leveraged Loans, while Investment Grade Corporate Bonds got hit the hardest as spreads between Corporates and U.S. Treasuries started to widen.

Wrap up

                We appreciate your time and the opportunity to share with you our investment thoughts.  We strive with our communications to add to our clients understanding of our investment management thoughts, which we hope will help improve longer term performance. You can submit questions to

We appreciate your time and will talk to you again soon,

Reggie McFadden, CFA 


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Performance Disclosures

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. (JPM: Guide to the Markets)

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index (JPM: Guide to the Markets)

The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (JPM: Guide to the Markets)

The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. (JPM: Guide to the Markets)

The MSCI®EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. (JPM: Guide to the Markets)

The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. (JPM: Guide to the Markets)

The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. (JPM: Guide to the Markets)

The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. (Ishares) 

XOM is the common stock symbol of ExxonMobil Corporation that trades on the exchange