posted on July 13, 2015 08:47
Returns across asset classes were mostly negative as investors digested news on Greek’s possible default and exit from the Eurozone. U.S. stocks outperformed international stocks for the month, and bond returns were mostly negative as yields rose. The S&P 500 Index returned just 1.2% at this year’s half time, while international large stocks and international small stocks have gained 5.5% and 10.6% this year, respectively.
- First‐quarter real GDP growth sputtered with the final estimate coming in at -0.2%. The contraction in growth was expected due to the impact of the harsh winter, port strikes on the West Coast, and the reduction in oil drilling.
- Inflation (CPI) was up 0.4% for the month, bringing the year‐over‐year inflation rate back up to 0.0%. Inflation was lifted by rising energy prices.
- Job gains in June were slightly lower than expected at 223,000. However the unemployment rate ticked down to a fresh five‐year low of 5.3%.
- The S&P 500 Index fell 1.9% and U.S. small stocks (Russell 2000) gained 0.7%. Consumer discretionary was the only sector to post a gain (+0.6%), while utilities dragged on the index with a 6.0% decline.
- Developed international large cap stocks fell 2.8% in June; however, their 5.5% year‐to‐date return is still strong. Small cap stocks in the developed international markets were also down but have generated even more year‐to-date with a 10.6% return.
- Emerging markets dropped 2.6% as returns in China, Indonesia, Malaysia, and South Korea were largely unfavorable.
- The 10‐year U.S. Treasury yield increased to 2.35%, up from 2.12% the month prior.
- Bond returns in the U.S. short‐ and intermediate‐term segments were negative due to rising rates. TIPS returned ‐1.0% and international bonds were down 1.5%.
- REITs were hurt by rising rates and declined 3.7% for the month. Commodities gained 1.7% mainly due to the surge in grains.
Greek Bailout – Third Time’s the Charm?
Just as it was starting to get quiet! The Greek debt crisis hit the news again. Most of the coverage has been centered on speculation as to whether Greece and its creditors will be able to reach a deal for yet another bailout. And, as usual, analyst opinions are all over the map. Some analysts are saying Greece doesn’t matter at all while others are claiming it will cause widespread contagion that could break the global economy. But, putting the scary headlines aside, we’re going to do our best to keep this in perspective.
Returns across asset classes were mostly negative as investors digested news on Greek’s possible default and exit from the Eurozone. U.S. stocks outperformed international stocks for the month, and bond returns were mostly negative as yields rose. The S&P 500 Index returned just 1.2% at this year’s half time, while international large stocks and international small stocks have gained 5.5% and 10.6% this year, respectively.First off let’s take a hard look at the situation. Greece’s economy is a mess. With an unemployment rate over 25% and eight straight years of economic contraction, it makes the last U.S. recession sound like a picnic. Although measures have been taken to reduce debt, Greece’s spending has been out of control for quite some time. But the European Union and IMF (International Monetary Fund) have continued to aid Greece in kicking the can down the road to avoid making even larger fiscal reforms necessary to bring their budget under control.
While negotiations with creditors are still under way, Greece failed to make a $1.7 billion repayment to the IMF on June 30 and is effectively in default. On July 5, the Greek citizens voted ‘no’ to accept creditors’ proposed austerity measures in exchange for a third bailout.
Going forward, we can’t be certain how the negotiations will play out and the impact on the global economy. What we do know is that Greece’s financial woes haven’t come as a surprise, and therefore the market has already priced in Greece’s probability of default. This will help to soften the impact as the situation unfolds.
To help keep the situation in perspective, the size of the Greek economy in terms of GDP is less than half the size of the Chicago metro area. It is also worth noting that direct exposure to Greece in Savant Wealth Models is virtually zero (ranging from 0.00% to 0.08%).So while most investors will be caught up in the drama over the coming weeks, wise investors will sit back and stay focused on the long term.
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