Last Quarter Round-Up 

Last quarter, I commented that I did not see significant market drivers for the second quarter.  That pretty much turned out to be the case.  The market was up nicely for the quarter with the S&P 500 closing at 1,960, a +4.7% gain.  Interestingly, bonds were also up at +2%.  Once again, the U.S. far outperformed International markets which were up only +1.7% for the quarter.  Emerging markets, however, outperformed the U.S., up +5.4% for the quarter.

Not much happening in the U.S. politically as our Congress eases into their summer recess.  The rhetoric will be aplenty when they reconvene and prepare for elections later this year.  The standoff in the Ukraine continued with the U.S. and Russia vying for influence in Eastern Europe.  While I do believe Russian President Vladimir Putin has done an exceptional job of managing his takeover of Crimea and the Black Sea fleet, Russia comes into this sparring match from a fairly weak position.  Militarily, Russia is no match when the U.S. is involved.  Second, Russia's influence is waning in other former Soviet states, most recently with Georgia and Moldova.  Iraq has once again erupted as the terror group the Islamic State of Iraq and the Levant (ISIL) has taken over numerous cities north and west of Baghdad.  Iraq seems to be devolving into a power struggle between the Sunni, Shia and Kurdish groups.  The brutal dictator, Saddam Hussein, kept these groups under relative control when he was in power.  As the saying goes, be careful what you wish for.

Current Quarter Outlook  

My outlook for the coming quarter continues along the same lines as the past few quarters.  I don't see a significant driver of market events here in the U.S.  The markets could continue their upward moves, or go into more of a flat, holding pattern.  Stock valuations in the U.S. are looking stretched.  While it is always possible that a correction could come, especially after the gains of the last 2-1/2 years, I don't see the catalyst.  Of course, the catalyst isn't always readily visible, so I find it important to consider where it might come from and try to prepare accordingly.  The situations in the Ukraine and Iraq, while tragic for the residents there, are not of significant concern to the global markets.  Ukraine's impact on Europe seems less than originally feared.  Oil access is a potential issue in Iraq, but it is under control at this time.  Understand that both of these situations are volatile and could become more impactful.  That is not my base case, but it is certainly possible.

Europe's evolution continues.  Last quarter the European Central Bank (ECB) lowered interest rates and began charging banks to hold excess reserves.  I believe these maneuvers may portend the adoption of an asset purchase program such as our own Quantitative Easing (QE) program later in the fall.  A program like that could be beneficial to the European recovery and positive for European investments.  My equity strategy is to remain fully invested with an underweight to the U.S. and an overweight to both International and Emerging markets.  For fixed income, I will add to inflation-protected bonds and continue to be overweight in alternative investments.