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Monthly Market Update - February 2015

March 16, 2015

Market Update – February 2015
February was a great month for global stocks! The S&P 500 (U.S. large cap stocks) was up 5.7% and U.S. small stocks (Russell 2000) gained 5.9%. The U.S. jobs report was strong and the unemployment rate ticked down to 5.5%. Developed international stocks outperformed U.S. stocks across the board as large stocks returned 6.0% and international small stocks returned 6.1%. Emerging markets returned a more modest 3.1%. Bond returns were negative as the 10‐year U.S. Treasury yield rose to 2.0%, up from 1.7% last month. U.S. intermediate‐term bonds declined 0.7%, international bonds fell 0.5%, and inflation‐protected bonds fell 1.2%. REIT returns were negative (‐1.6%), but commodities gained 2.6%.

Economy

  • The second estimate of fourth‐quarter U.S. real GDP growth came in at 2.2%, slightly below the initial estimate of 2.6%.
  • Inflation (CPI) in the most recent month was negative at ‐0.7% bringing the year‐over‐year inflation rate to ‐0.1%.
  • The February jobs report was strong with 295,000 jobs added in February. The U.S. unemployment rate ticked down to 5.5%.

Stocks

  • The S&P 500 Index returned 5.7% and U.S. small stocks returned 5.9%. Returns were strong across all sectors except for utilities (‐6.4%). 
  • Developed international large cap stocks returned 6.0%. Progress with Greece’s creditors and the anticipation of quantitative easing in the Eurozone provided a tailwind. 
  • Emerging markets gained 3.1% as Russia recovered and lifted the index with a 22.8% gain.

Bonds

  • The 10‐Year U.S. Treasury yield rose substantially to 2.0%, up from 1.7% the month prior. As a result, bond returns were generally negative in February.
  • The Federal Reserve also confirmed that if economic conditions continue to improve, they will raise short‐term interest rates.

Alternatives

  • REITs declined 1.6% and commodities gained 2.6% helped by higher energy prices.

NASDAQ Reaches 5000: Another bubble?

It’s amazing it was only 15 years ago. All the hype. All the excitement. And all the profits! The technology industry was booming in the 90s and everyone wanted to be a part of it. Sure there were still disciplined index investors, but at the time those investors felt like they were being lapped. When their portfolios returned “only” 10% for the year, they would have been happy if their neighbor wasn’t bragging about a company he tripled his money on. The rapid rise in technology startups gave way to some of the most exciting times in investment history. But on March 10, 2000, that was all about to change. The NASDAQ
peaked at 5,133 and didn’t bottom out until October 8, 2002, falling all the way to 1,110. Take a second to catch your breath, that’s nearly an 80% drop. And that’s for the investors wise enough to at least diversify among their technology holdings. Investors with just a handful of holdings may have watched their portfolios go to $0 as companies that were expected to make millions went bankrupt and never made a penny.

So it is understandable why investors may express concern rather than excitement when they see the NASDAQ reach the 5,000 level again 15 years later. But in hindsight the explanation for the decline is simple. Stock prices were not supported by earnings.

So the big question is: are prices better supported today? And the answer is absolutely. Toward the peak of the tech bubble the P/E (price/earnings) ratio of the NASDAQ soared well above 100. In other words, stocks were very expensive compared to the earnings they were generating. For reference, the average historic P/E ratio for the NASDAQ is 24.4, and the index currently sits at 23.0 (as of 3/6/2015). This means that stocks today are selling at a discount to historic averages even as corporate earnings appear strong and continue to grow.

So as we pause in a moment of silence for the money lost, it is important that we learn from the mistakes of others. Some people will always prefer a flashy investment strategy because of the thrill that comes from gambling. But for those of us who want a more secure future, diversification will always be the best strategy.


Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com

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