Fixed-income market performance was mixed during January with Investment-grade U.S. corporate debt turning in the best performance, followed by U.S. Treasury Securities and Treasury Inflation-Protected Securities. U.S. asset- and mortgage-backed securities, performed well and U.S. high-yield debt delivered a firmly positive performance. Unhedged global debt occupied negative territory again amid ongoing dollar strength.
As a group, global equity markets, as reflected by the MSCI AC World Index, declined in January. The healthcare sector led, followed by telecommunications, consumer staples and utilities. Energy remained the worst performer, followed closely by financials. Regionally, through the lens of a strong U.S. dollar, Asia was mixed-to-positive, despite providing seven of the top ten country-level returns; India and the Philippines were the two best performing countries worldwide. Northern Europe was mostly positive, while Southern and Eastern Europe ran the gamut of negative returns. Italy was essentially flat, while Greece, which is attempting to renegotiate the terms of its bailout, had the worst overall returns. Russia was negative but nowhere near the fourth quarter’s depths. The U.K. declined, as did Australia and New Zealand. The U.S. turned in negative performance as well, but was best off in relative terms in comparison to the rest of the countries throughout the Americas.
Amidst slow but mostly positive economic growth, a historic decline in oil prices, near-zero interest rates and the ardent pursuit of unconventional monetary policies by the world’s most important central banks, it is tempting to assume the bull market is in jeopardy. But despite recent volatility, our tendency is to remain optimistic regarding equity markets.
While it’s still a scary world out there, the oil price slide hurts some of the more nefarious actors on the world stage— Russia, Iran, Venezuela, the Islamic State (ISIS), and so on. Anything that constrains or moderates their aggressive behavior should be good for the investment outlook. The collapse in oil prices is a net positive for oil-consuming countries and regions, both developed (the U.S., Europe, Japan and Korea) and emerging (China, India and Asia-Pacific). In places where inflation is already well below target (Europe, Japan, Korea and India), lower energy prices (which further reduce the threat of inflation) may encourage central banks to keep ultra-easy monetary policies in place for longer in an attempt to stimulate economies.
Of course, every year has its surprises, good and bad. Since our view is generally positive, we need to consider what can go wrong—more aggressive tightening by the U.S. Federal Reserve, further slowing of economic growth in China, political dysfunction (especially in the U.S. and U.K.) and, of course, further turmoil involving Russia.
The U.S. may be the cleanest dirty shirt in the laundry bag, but it remains a magnet for capital in a return-hungry world. Although the strengthening dollar will have a negative impact on the earnings of U.S. exporters, lower import costs should provide an offset. In short, a strong dollar should not spell the end of the multi-year bull market in U.S. equities. Valuations may be elevated in the U.S. compared to other countries, but we believe relatively strong-and-steady profit growth justifies the higher price-to-earnings ratio applied to U.S. stocks. Additionally, according to Ned Davis Research, the S&P 500 has performed better than average in the 12 months following the start of a rate-hike cycle. It still seems that buying on market pullbacks may be the appropriate strategy for the coming year.
Meanwhile, given their relative cheapness, equity markets that have badly lagged the U.S. in recent years could start to play catch-up, assuming economic growth starts to gain some traction. In general, we think developed international markets should provide more consistently positive performance in 2015, given the tailwind of lower energy prices, more accommodative monetary policies and some easing of fiscal constraints (that have hurt the eurozone in particular).
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
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