04.15 Q1 2015: Market Volatility Rules the Day
“You can take me to paradise, and then again you can be cold as ice.” – Fleetwood Mac
Although the S&P 500 ended the first quarter of 2015 up just less than 1%, there were plenty of volatile trading days to keep things interesting. Sixty percent of the trading days in the quarter resulted in triple digit changes for the Dow Jones Industrial Average.
Big stories for the 1st quarter were M&A news, crude oil, Iran, the Federal Reserve and strength of the US dollar. On the M&A front, Q1 2015 global deal activity was at the best levels since Q1 2007 with activity pegged at $843 billion.
Crude oil was down 8.5% after a big drop in 2014 and the US dollar index was up about 9%. Although crude prices ended the month lower, on a daily basis there were a number of big swings of + or – 5% or so. Often these swings were in reaction to weekly storage numbers which are volatile and subject to big revisions weeks later.
There was a great deal of concern over the timing of interest rate increases by the Federal Reserve. Commentary from the Fed was generally benign with the Fed dropping the reference to remaining “patient” in guiding interest rates higher but in a later press conference Fed Chair Janet Yellen clarified the Fed’s intent saying that it “doesn’t mean we are going to be impatient.”
Treasury yields generally dropped in the 1st quarter with the 10-year going from a yield of 2.17% to 1.94%, and the 30-year going from a yield of 2.75% to 2.54%. How long will investors be willing to chase yields in the face of the Fed’s stated policy of raising short term interest rates?
How are things lining up for the balance of the year?
Market volatility will likely continue at elevated levels. Historically, periods of high volatility trading in a tight range tend to resolve themselves with a sharp move (breakout/breakdown) from the range. The hard part is determining which direction the move will be. For the past few years, many equity investors and their advisors have had success using passively managed index products. This strategy promises to be more difficult going forward as it becomes increasingly crowded and the rally becomes longer in the tooth.
Advisors and their clients may need to take a more strategic approach to investment management going forward. It could be time for advisors to go beyond asset allocation models and to steer their clients towards quality active managers and/or proprietary strategies. This could help protect clients in volatile markets and possibly generate better returns over the next phase of the investment cycle.
James Mathis, Managing Partner, Echelon Investment Management
Photo Credit: Alex Brogan via Wikimedia Commons