June 2015 Recap
The month of June brought the second quarter and the first half of 2015 to a close, and so far this year has been a tale of two markets. The first quarter was marked with a rising dollar, a soaring Chinese stock market, GDP contraction in the U.S. and collapsing interest rates that sent yields on several European fixed income securities into negative territory. Each of these trends reversed in the second quarter offering investors a stark reminder of how quickly markets can change. The S&P 500 fell slightly for the second quarter. The Dow Jones Industrial Average slipped less than 1% with almost all of the losses coming during the month of June. The Nasdaq Composite was the best performing index for the three month period, marking a tenth straight quarterly advance, ending up 1.75%.
HOUSING MARKET HEATING UP WITH SUMMER
June started off with the release of a few notable housing statistics that pointed to continued momentum. New home sales in April were well above expectations showing a 6.8% month-over-month rise to an annual rate of 517,000 units. Late in the month, data from the National Association of Realtors indicated the housing recovery continues to gain steam. For the month of May, existing home sales jumped 9.2% from a year earlier. New homes sales (a much smaller part of the market) were up 20% year-over-year, the highest level since 2008. Importantly, first time buyers now represent nearly a third of new purchases. Additionally, the value of homes continues marching higher. On the last day of June, the S&P/Case Shiller Home Price Index was released showing 4.2% growth in the value of homes. Housing, along with auto purchases, is a typical early-to-mid cycle grower, indicating we could still be far away from a domestic recession.
CHINESE STOCKS: THE YEAR OF THE BEAR
One of the biggest turn of events during the month of June was the implosion of the Chinese stock market. As of June 12, the market has risen more than 160% off of the low in 2014 as it reached a seven year high. This created a bona fide mania among Chinese retail investors as brokerage firms scrambled to open new accounts. Just three weeks later, the Shanghai market has collapsed almost 29% and Shenzhen has dropped more than 30%. Investors are being forced into selling for fear of margin calls, pushing the market lower despite stimulus initiatives like recent rate cuts. This has prompted the Chinese government to take several steps to calm the market. So far, new initial public offerings have been suspended, quotas allowing foreign shareholders to buy more stock have been lifted and the government has increased the capacity for investors to borrow to buy shares. The government has also taken to buying stocks to prop up the market. Chinese media have reported that China’s four large onshore A-share ETFs received more than $6.4 billion of inflows over the last week.
THE RETURN OF VOLATILITY, BUT NOT REALLY
At the beginning of the year, one of the few things financial experts agreed on was that volatility would pick up through 2015 and during the first quarter this was true. While the most broadly cited measure of volatility is the Chicago Board Options Exchange’s Volatility Index, better known as the VIX, another way to measure volatility is to look at the number of days where indexes post a move greater than 1%. According to Ned Davis Research, since 1902 the Dow Jones Industrial Average makes these outsized moves about 23% of the time. From 2012 to 2014, sharp one-day moves occurred at nearly half that rate, just 13% of trading days. Through the end of the first quarter, anxious investors pushed the market 1% or more, approximately 30% of the time. However, while equity markets have had a higher percentage of days with 1% moves this year than last, the S&P 500 has traded in the smallest range since 1995 and the volatility witnessed in the early part of the year has dissipated. The S&P 500’s 2015 low is only 6.5% below its high, well off the double-digit average for the past several years. The same is true for individual names within the index. The average high to low percentage move is just below 18%, nearly half of the long-term average. Another piece of evidence that the market has remained within a narrow band this year is stocks are just 5% below the average price for the past 100 days. And, before the second half of June, the S&P 500 posted seven straight weeks with a move of less than 1%, the longest stretch since 1994.
The first half of 2015 is a good reminder of how quickly things can change. While it’s important to stay on top of the changes, investors must remain disciplined. Reacting and following several trends of the first quarter could have been a disaster as many reversed during the second three month period of the year. With rate rises on the horizon and what seems to be a never ending drama with Greece, we expect rapid market fluctuations to continue throughout the year. We also believe approaching the increasingly volatile financial world with a disciplined plan will win over the long run. As always, we encourage clients to talk to their investment advisor to discuss how this information applies to their unique circumstances.