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Quarterly Commentary – March 2015

The start of the first quarter of 2015 saw U.S. equities drift lower as investors worried about a slowing economy. February saw a complete reversal with a move upward as more quarterly earnings reports from companies came out. March started on a down note, only to rebound somewhat in the latter part of the month. There were a number of fairly dramatic swings. Looking at smaller U.S. companies, their stock prices fared better reflecting a more steady increase. The following are performance numbers from various popular indexes. These index numbers individually are not comparable to a properly diversified portfolio. A diversified portfolio may include various allocations to securities similar to these indexes, but your personal allocations are based on your risk tolerance and the indexes should only be compared in that context. The S&P 500 reflected an increase of 0.9% for the first quarter of 2015. The Dow Jones Industrial Average was up 0.3%. Small company stocks represented by the Russell 2000 Index ended up 4.3% for the quarter. International equities as represented by the MSCI World Ex U.S. Index were up 3.8%. Fixed Income as represented by the Barclays Aggregate Bond Index closed up at 1.6% for the quarter.

The year started with the assumption that U.S. growth would contribute to increased company earnings which would in turn support increasing stock prices. What played out was a rising dollar, becoming a potential drag on some portion of our economy. We experienced a slowdown in manufacturing and business sentiment. The winter weather also played a factor particularly on retail sales. The bright spots were the labor market with improving readings for jobless claims coming in at better than expected, rising consumer spending and new home sales which surprisingly surged in February with median pricing for homes increasing year over year while inventories decreased. Despite these bright spots, growth has not materialized quite as expected. The low inflation and the moderate growth do help support the case for the Federal Reserve to increase interest rates at a slower pace when it begins to do so. This remains supportive for our equity markets. With mixed economic data, there is a tendency for investors to place a lot of focus on what the Fed might do. The expectation is for a hike in rates sometime this summer, although if inflation stays well below 2% and economic activity does not pick up pace from here, it would not be surprising if they delay the move.

We have a situation where the U.S. economy is growing modestly, the larger emerging countries such as India and China are in recovery mode while the situation with Europe and Japan have deteriorated. The global expansion is not in sync and is weak with disinflation concerns at the forefront. With the vast majority of the global equity market capitalization around the world supported by very low or zero interest rate policies, it is unlikely that we would experience the end of the expansion cycle which will probably prove to be the longest on record. In this type of environment, risk assets such as equities should continue to be rewarded while volatility will certainly continue.

We will likely see more deterioration in the earnings trend near term from lower energy prices and a stronger dollar. We would expect improvements in the second half of the year as the recovery gains traction. When the Fed does raise rates, it will most likely do it very slowly and carefully. While such action from the Fed should be viewed from the perspective that the economy has indeed strengthened enough to warrant it and should ultimately be positive for equities, the speculation about the pace of future increases could further exacerbate the volatility. Investor sentiment has improved but investors are not overly exposed to equities which is a good sign as it is even less likely that this bull market will be ending near term.

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