Market Data for the quarter ended March 31, 2015

• S&P 500 Stock Index:  2068, up 0.4%
• Ten-year Treasury Note Yield:  1.93%, down 0.24%
• Gold:  $1,184 per ounce, up 0.1%
• Oil:  $48 per barrel, down 11.1%

The stock market stalled in the first quarter of 2015, as it struggled to come to grips with the prospect of higher short-term interest rates driven by the US Federal Reserve in the face of mediocre global and domestic economic growth.  The Fed has made no secret that it would like to begin tightening monetary policy after over six years of zero percent overnight interest rates.  Higher interest rates restrict economic growth and make stocks look less attractive relative to interest paying assets, such as bonds and cash.  While employment data has been relatively robust, other domestic economic data, notably retail sales and durable goods production, have been less so, and the global economy remains fragile.  While the surge in supply form US shale drilling is a significant factor, the collapse in the oil price of the last nine months is seen by many as evidence of anemic global demand.  The ten-year Treasury note interest rate declined over the quarter, as well, pointing to weaker growth.

As the Fed looks to tighten policy, the central bank of nearly every other major economy continues to loosen monetary policy, (the Bank of England is the exception).  This has significantly impacted the value of the US dollar versus other global currencies.  Fed Chairman Janet Yellen seems to grasp that as long as US inflation remains well below the Federal Reserve’s target rate of 2%, aggressive tightening of monetary policy is inappropriate.  (As per the Fed’s preferred measure, US inflation has risen 1.4% over the last year.)  However, the mere discussion of tightening has dramatically driven up the value of the US dollar.  This in turn has already weakened the US economy absent an actual interest rate increase itself.  A strong dollar makes US manufactured goods less competitive and reduces the profits of multi-national American corporations.

This dynamic has yet to fully play itself out and will continue to be the primary factor influencing the course of stock prices.  Geopolitically, further risks are presented.  Greece may leave the Eurozone, i.e. drop its use of the Euro currency.  A country leaving the Eurozone is unprecedented, and the ramifications could be highly destabilizing to the global financial system.  An escalation in the crisis in Ukraine could further weaken a struggling European economy, while instability in the Middle East has the potential to disrupt oil production and drive crude prices higher.  In domestic politics, the threat of another debt ceiling standoff is possible at mid-year.  In 2011, such a manufactured crisis led to extreme volatility in stocks.

Taken together, we are cautious regarding the prospects for stocks over the remainder of the year.  After six years of strong gains, share prices are at the upper end of historical valuations.  This fact and given the factors discussed above, a consolidation in the stock market would not be surprising.  That having been said, we feel the potential for a significant downturn is currently remote.  We do not see the financial or economic excesses that typically drive bear markets and recessions.  For the remainder of the year, we see the S&P 500 stock index trading in a range from 1950 to 2250.  The index is currently at 2068.