The Value of a Dollar
At the beginning of March, the S&P 500 hit another all-time high, but it promptly retreated from that high. Despite another upswing later in the month, it finished the month with a small loss. With the beginning of foreign stimulus programs, rumors of interest rate changes, and lukewarm economic news, investors were reluctant to make large changes to their portfolios. In fact the only significant trend was investors cautiously increasing their exposure to European stocks.
Back in January the president of the European Central Bank (ECB) announced a quantitative easing (QE) program. Much like the similar programs employed by the Bank of Japan and the US Federal Reserve, the ECB’s plan calls for buying bonds to hold down interest rates, encourage borrowing, and stimulate the European economy. March 9th marked the first purchases of the program. Since the ECB’s announcement in January, European stock indexes managed to climb higher, but they gave back some of those gains in March. Meanwhile, the euro continues to lose value and, as the US dollar gains strength, the two stand nearly equal for the first time since 2002.
This shift in the foreign exchange market is significant, and the strong dollar is currently a dominant force in the US markets. With the Bank of Japan and the European Central Bank in the midst of stimulus measures, the dollar is gaining strength relative to the yen and the euro. The increased purchasing power of the dollar provides US investors with an advantage as they invest overseas. Now, while the dollar is strong, they are able to purchase larger positions in foreign assets, and those assets will rise in value when those foreign currencies recover. The downside for the US economy is that this trend encourages investors to seek investment opportunities outside of the US.
In spite of the strengthening US dollar, the US economy continues to recover well. Unemployment numbers are falling and many of the other economic indicators are also showing momentum. This combination of factors means that the US Federal Reserve is starting to think about an interest rate increase. Obviously, any action by the Fed causes disagreement among analysts and economists alike. Some think that a rate increase is long overdue and others worry that the economy is still too fragile, but the improving economic data indicates that rates will start to rise before the end of the year. Since the end of the Fed’s quantitative easing program, the Fed has promised to be “patient” before raising rates. That term has been present in each of the recent official messages from the Fed, but it was notably absent in March. In order to avoid any sort of panic or shock when it announces the first rate increase, the Fed is attempting to delicately communicate its intentions in advance, but most analysts are predicting that the first increase will come in the second half of 2015.
Across many of the major asset classes, March was a month of ups and downs, with stocks peaking in the opening week and again later in the month. Some of the individual asset classes saw gains in March, but the major asset categories all finished with losses. Since the beginning of the year, most of the allocation changes that we implemented have been overwhelmingly positive. This has resulted in exceptional first quarter performance across our Core Allocation portfolios. Our lower risk strategies generally outpaced the S&P500’s near 1% return while our higher-risk portfolios generated almost three times this return. Issues such as the state of the US dollar and Fed interest rate actions continue to be important drivers of our asset allocation decisions within the portfolios. We will likely make additional allocation changes prior to year-end as these market and economic situations unfold.
- US small-caps (VB) and mid-caps (VO) performed well and helped to balance out the modest losses in large-caps (IVV) during the month of March. Our elevated allocation to US Stocks delivered substantial value during the first quarter.
- Foreign stocks disappointed in March (VEA, VSS, VWO). As QE ramps up and begins to impact the European economy, we expect that European stock performance will improve; much like US stocks did under the US Federal Reserve’s QE program. Yet, for the last 3-months, foreign stocks have performed much better than US stocks which boosted our portfolio returns.
- US bonds held their values in March and have provided modest returns for the first quarter. US treasuries (SHY), US corporates (VCIT), and US Mortgage-Backed (VMBS) showed that investors preferred higher-quality bonds which we had over-weighted at the beginning of the year.
- Foreign bonds (BWX, PICB, WIP) struggled again – we expected that 2015 would be a difficult year for these assets and had reduced our holdings accordingly. Our allocation to emerging bonds (PCY) provided value in the midst of a particularly difficult month for foreign bonds in developed countries.
- The start of European QE and volatility in oil left commodities (DBC, GLTR) and master limited partnerships (AMJ) with losses. We effectively reduced these allocations at the beginning of the year helping to provide some shelter.
- Hybrids continue to impress. In March, preferred stocks (PFF) saw a nominal gain and convertible bonds (CWB) saw a small loss, which nearly balanced each other out. Hybrids remain strong performers in our portfolios while offering lower volatility than stocks and hard assets.
INVESTMENT ADVISORY SERVICES OFFERED THROUGH ALPHASTAR CAPITAL MANAGEMENT, A SEC REGISTERED INVESTMENT ADVISOR. INVESTMENT MANAGEMENT SERVICES MAY BE PROVIDED BY A SUBADVISOR. INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL. NO INVESTMENT STRATEGY, SUCH AS ASSET ALLOCATION OR DIVERSIFICATION, CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS IN PERIODS OF DECLINING VALUES. PLEASE NOTE THAT REBALANCING INVESTMENTS MAY CAUSE INVESTORS TO INCUR TRANSACTION COSTS AND, WHEN REBALANCING A NON-RETIREMENT ACCOUNT, TAXABLE EVENTS WILL BE CREATED THAT MAY INCREASE YOUR TAX LIABILITY. REBALANCING A PORTFOLIO CANNOT ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN ANY GIVEN MARKET ENVIRONMENT. INVESTMENTS INVOLVE RISK AND, UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO CONSULT WITH A QUALIFIED FINANCIAL ADVISOR AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGIES DISCUSSED HEREIN. THIS REPORT IS PRESENTED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. FURTHER, THIS INFORMATION IS NOT INTENDED AS A REPLACEMENT FOR THE ACCOUNT STATEMENT SENT TO YOU BY THE QUALIFIED CUSTODIAN. THE INFORMATION PRESENTED IN THIS REPORT IS BELIEVED TO BE ACCURATE, BUT OUR FIRM CANNOT GUARANTEE THE ACCURACY OF THE DATA. UNDER NO CIRCUMSTANCES SHALL OUR FIRM OR ANY OF ITS AFFILIATES, OFFICERS, EMPLOYEES, OR AGENTS BE RESPONSIBLE FOR DAMAGES, ERRORS, OMISSIONS, INACCURACIES, OR MISUSES OF THIS REPORT BY YOU OR YOUR AGENTS. THE PERFORMANCE INFORMATION PRESENTED IN THE ASSET CATEGORY SECTION OF THIS REPORT IS BASED ON EQUAL-WEIGHTED AVERAGES OF THE FOLLOWING: US STOCKS (ISHARES S&P 500 ETF, S&P DIVIDEND ETF, VANGUARD MID CAP ETF, WISDOMTREE MIDCAP DIVIDEND ETF, VANGUARD SMALL CAP ETF, WISDOMTREE SMALLCAP DIVIDEND ETF), FOREIGN STOCKS (VANGUARD MSCI EAFE ETF, ISHARES INTERNATIONAL SELECT DIVIDEND ETF, VANGUARD EMERGING MARKET ETF, WISDOMTREE EMERGING MARKETS EQUITY INCOME ETF, ISHARES MSCI EAFE SMALLCAP ETF, VANGUARD FTSE ALL WORLD EX-US SMALL ETF), US BONDS (ISHARES BARCLAYS 1-3 YEAR TREASURY ETF, ISHARES 3-7 YEAR TREASURY BOND ETF, ISHARES 10-20 YEAR TREASURY BOND ETF, ISHARES BARCLAYS MORTGAGE BACKED ETF, ISHARES IBOXX INVESTMENT GRADE CORPORATE ETF, VANGUARD SHORT-TERM CORPORATE BOND ETF, ISHARES BARCLAYS TIPS ETF, PIMCO 1-5 YEAR US TIPS INDEX ETF, SPDRS HIGH YIELD ETF, SPDR BARCLAYS SHORT-TERM HIGH-YIELD BOND ETF, POWERSHARES SENIOR LOAN ETF), FOREIGN BONDS (SPDRS BARCLAYS INTERNATIONAL TREASURY ETF, SPDR BARCLAYS SHORT-TERM INTERNATIONAL TREASURY BOND ETF, POWERSHARES EMERGING MARKET DEBT ETF, SPDRS DB INTL GOVERNMENT INFLATION ETF, POWERSHARES INTERNATIONAL CORPORATE BOND ETF), HARD ASSETS (POWERSHARES DB COMMODITY ETF, SPDRS GOLD ETF, ISHARES SILVER TRUST ETF, JP MORGAN ALERIAN MLP ETN, SPDRS DJ GLOBAL REAL ESTATE ETF), AND HYBRIDS (ISHARES S&P US PREFERRED STOCK ETF, SPDRS BARCLAYS CONVERTIBLE SECURITIES ETF).