Overseas Opportunities
April was difficult for the US economy. Several economic indicators, including gross domestic product (GDP), suggested that the US economy’s recovery may be slowing. While analysts have been predicting a correction in the US stock market, none of this data was significant enough to trigger such a selloff. Instead investors were content to start looking for opportunities overseas, especially in Europe.
It is worth noting that this economic data is closely watched by the US Federal Reserve (the Fed) and it factors heavily in the Fed’s decision-making process. For months, the Fed has been warning that it would start to raise interest rates during 2015 and hinting that rate hikes would begin mid-year. Analysts have been predicting that the first rate hike would be announced in June. After the disappointing data released in April, analysts revised their predictions and now assume that the Fed will raise rates in September.
As investors invest overseas, they are benefitting from the strong US dollar. As the dollar gains strength, investors are able to purchase European assets cheaper than they were previously. If the Euro regains some strength, those investors will be able to sell their European investments at a premium. This principle also works in reverse. Currently, foreign investors are able to sell their US assets at a premium and use those funds to purchase assets elsewhere.
Over the winter, the European Central Bank (ECB) announced a stimulus program for the Eurozone that is intended to stabilize its bond markets and jumpstart its economies. The program got off to a rocky start and did not seem to produce the intended results, but the European markets found their feet in April. The ECB’s stimulus program encouraging investment in the Eurozone and the strong US dollar discouraging investment in the US turned out to be just the combination that investors were waiting to see. European stocks failed to keep pace with their US counterparts over the past two years and they remain attractively priced. Now that investors are gaining confidence in the economies of the Eurozone, they are starting to take advantage of those opportunities.
Last June, the price of oil started to fall from its high of more than $100 per barrel and, by January of this year, it hit a six-year low of about $45 per barrel. That collapse of approximately 60% was a dramatic shock to the energy sector. In the US, where oil production is expensive, there were legitimate fears that low oil prices could produce a wave of bond defaults as smaller energy companies would be unable to make their debt payments.
For those affected by low oil prices, April was a welcome relief. Oil prices finally started to rebound on news of continued strong demand for oil and a steady decline in the number of North American oil rigs. However, this rebound may be short-lived. The rising price of oil encourages US oil producers to increase their oil production again, which may push the price back down. At this point, analysts are skeptical and the consensus it is still too soon for oil to make a full recovery.
In April, international investments took the spotlight and we anticipate this trend will continue. Many investors have become accustomed to US stocks dominating the global markets, but there are many good reasons to look outside the US for investment opportunity. Our foreign market exposure proved valuable within the stock and bond allocations of our portfolios. We carefully monitor the balance of investment opportunities at home and abroad, and we will be adjusting our allocations to those asset categories as necessary. US stocks were largely in the red for the month and lag foreign stocks by a significant margin year-to-date. The Core Allocation portfolios generally outpaced the S&P500 for the month, but provided significant outperformance relative to the S&P500 year-to-date while also reducing risk.
