The first half of 2015 has the S&P 500 up 0.20%, the Dow Jones Industrial Average down 1.14% and the Russell 2000 up about 4.75%. We believe these indices to be illustrative of the volatility of a market in need of more of a correction. While some of the major indices are very near their highs, many individual stocks are not, which may translate to investors not experiencing returns in line with these indices. This should serve as a reminder that we generally don’t strive to match the returns of the major indices, as we employ a much different asset allocation for investors, based on individual needs. As for our clients, most have 20-25% in cash, which can be deployed when a correction or pull-back in equity prices occurs. These corrections or pull-backs are necessary and healthy.
For the first 6 months this year, there has been greater merger activity than at any other time. Most of the action occurred in media, healthcare, and the telephone sector. There have also been a pretty significant issuance of initial public offerings. All of these items are usually strong indicators of a “toppy” market. However, we are seeing some real value in energy related names at this point, where we’ve already experienced a correction of sorts in terms of equity prices. Some investors still feel these names could drift lower, and we would use that as an opportunity to add new or existing holdings in that area.
Expect Greece to continue to weigh on the financial markets in July and August and the credit worthiness of Puerto Rico keeps getting more interesting by the day. The trepidation felt most in the U.S. is by Puerto Rico’s municipal bond holders. Furthermore, unlike Greece, Puerto Rico is a U.S. territory, so we will likely feel some of its’ economic collateral damage. More exciting to many investors are the Second Quarter earnings which will be released in a couple of weeks. If they disappoint, the Federal Reserve may think twice about raising rates in September. Conversely, if the economy continues to show strength, there will most definitely be a raise in September. The Fed knows that this “raise” is way overdue, and it will not be a “shock” to the market’s system in our opinion.
Therefore, now is a good time to get out your surfboard, put on your Birdwell’s, lather up and head to the beach. The best thing that can happen is values are much more enticing in the fall, and we get some great bargains. We will continue to manage risk while balancing the need to achieve desired returns.
Above all, let’s remember to be thankful for all that we have, enjoy the rest of the summer.
Alexander G. Campbell, III & Mark D. Scott