We held our second quarter 2015 investment strategy meeting
on March 24. The most notable changes following the meeting were an increase in
exposure to European stocks and modifications to our fixed income strategy.
We remain constructive on the outlook for U.S. stocks but
recognize volatility has increased in 2015 and we expect volatility will most
likely remain elevated in the near term for a number of reasons. The reasons
for the increased volatility so far this year include heightened uncertainty
over Federal Reserve policy, a temporary slowdown in corporate earnings growth,
and uncertainty over the health of the global economy. Going forward, we think
returns on U.S. stocks could be more moderate (mid to high single digits) compared
to the 15% annualized returns experienced over the past five years.
U.S. economic fundamentals remain constructive. We expect
another year of moderate 2.5-3% real GDP growth in 2015 with continued moderate
inflation. With improving job growth, lower oil/gas prices and strong dollar, we
believe U.S. consumers are in a stronger position to increase spending, which
should support economic growth and an acceleration in U.S. corporate profits in
2H-15.
Investors were highly focused on the March FOMC meeting for
indications of future direction of Federal Reserve policy. In our view, the
meeting supported continuation of the Fed’s gradualistic policy and it now
appears any rate increase by the Fed may be pushed out. We expect the Fed will
attempt at least one rate increase in 2015, most likely in the fall; however we
do not expect this rate increase to have a lasting impact on stocks as it is
highly anticipated and, historically, the first few rate increases in a
tightening cycle have not derailed a cyclical bull market.
The primary change to your portfolio this quarter was a
slight increase in allocation to equities through increased exposure to
international stocks. We introduced a holding in large European stocks as we
believe Europe is undergoing an improvement in economic and monetary conditions,
both of which should support higher valuations for quality European stocks.
Our macro allocation to bonds remained essentially
unchanged. Our current strategy in bonds is to underweight long-maturity bonds
and overweight short-maturity. We believe it is prudent to position your
portfolios for the eventual rise in interest rates which, typically causes more
volatility in long bond prices, thus our underweight in this sector. Our overweight
in short bonds reflects the fact that short bonds tend to be less sensitive to
rising rates and currently present an opportunity to capture a rising income
stream as maturing bonds get rolled into higher yielding bonds once interest
rates begin to rise.
3/27/2015
