Second Quarter Market Review July 2015

Global stocks produced mixed returns as signs of improving economic growth were offset by fears of rising interest rates and a worsening debt crisis in Greece. While news from Greece occupied most of the headlines, it was investors in China who saw the wildest ride during the quarter. The Shanghai stock exchange dropped 35% from its peak during the quarter, but was still up over 20% year-to-date and has still doubled over the last year. It was the biggest rout in this volatile market since 1992 and it prompted the Chinese government to take strong measures, in what many see as a big test of communist party control of the economy and the financial markets. The measures included cutting interest rates, relaxing margin requirements, cracking down on short sellers, using the media to calm investors with “happy talk”, propping up the market with government pension fund money and increasing the kinds of assets that can be used as collateral to buy stocks, to include – are you ready for this? – people’s homes! It is safe to say that whatever happens in China will have a far bigger impact than Greece. After all, China’s population is 123 times larger than Greece.

2015 07 chart 1

Higher commodity prices helped to support equities in Russia and Brazil. Energy heavyweights Gazprom (Russia) and Petrobras (Brazil) both rebounded in the wake of difficult periods. The Russian ruble rose 4% against the U.S. dollar during the quarter and 8% year-to-date.

2015 07 chart 2

During the second quarter, global bond markets struggled. The yield on the 10-year U.S. Treasury rose about 0.5%, finishing the quarter around 2.5%. Even with interest rates so low in the U.S., our bonds appear quite attractive to investors, certainly when compared to German or Japanese bonds yielding less than 1%. And lastly, returns on cash were zero again during the 2nd quarter. With the Federal Reserve holding short-term rates at zero for seven years now, safety has its price.

“What has history said of eminence without honor, wealth without wisdom, power and possessions without principle? The answer is reiterated in the overthrow of the mightiest empires of ancient times. Babylon, Persia, Greece, Rome! The four successive, universal powers of the past. What and where are they?”  Orson Whitney

Important Note: These materials are provided for informational purposes only.  Please do not assume that any information contained in this Insight serves as the receipt of, or as a substitute for, personalized investment advice from Madison.