Last Quarter Round-Up   

Last quarter, I commented that I thought we might see increased market volatility in the first quarter and that is exactly what we saw.  A bit more than one-third of all the trading days on the S&P 500 index moved by more than 1% up or down.  One percent may not seem like much, but that is considered a considerable move in a single day's trading.  Overall, the S&P 500 finished the quarter up only about +0.4% and the Barclay's Aggregate bond index was up about +1.6%.  International stocks were strong at +5.5% and Emerging Markets came in at +2.1%.  Overall, the U.S. markets were jagged given the Federal Reserve (Fed) indications of increasing interest rates and continued strong foreign capital flows boosting the value of the dollar.

Globally, the two biggest developments over the quarter were the Muslim partnerships developing in response to ISIS (the Islamic State of Iraq and Syria) and the makings of a U.S. nuclear agreement with Iran.  These two developments may be more related to each other than seems obvious.  My view is that the U.S. is moving away from its Middle East foreign policy of large-scale military activity to one of pursuing a state of balance.  That state would constitute the strongest regional powers of Israel, Turkey, Saudi Arabia and Iran to find a balance amongst themselves.  Not coincidentally, this grouping also represents a potential balance of the major local religions: Judaism (Israel), Sunni Islam (Saudi Arabia and Turkey) and Shia Islam (Iran).

Current Quarter Outlook 

My outlook for the coming quarter is similar to last quarter.  Assuming we continue on the Fed path of intending to raise interest rates and the strong U.S. dollar, the U.S. markets will likely continue their volatility.  And that volatility may show up as muted positive, or even negative returns.  I know this sounds like heresy, but given it has been nearly three and one-half years since the last 10% market correction, we shouldn't pretend it can't happen.  I believe International market regions will continue to improve and possibly begin to impact the substantial foreign capital flows coming to the U.S.

Here in the U.S., I expect our economy will continue its moderate pace.  Employment has improved, though the labor participation rate remains low.  Lower oil prices are a net gain for consumers, and may also help shield recent corporate profit concerns.  Globally, I believe the U.S. and Iran negotiations will continue toward a more detailed resolution on or near the June 30 deadline.  If I am right about my balance of power theory stated above, this agreement will move forward.  Israel, Saudi Arabia and Turkey have all become accustomed to the U.S. shouldering the brunt of their regional security efforts.  Bringing Iran into the mix may force these countries into a more active role.  We've seen some of this power-sharing behavior in the fight against ISIS and the Houthi rebels in Yemen.

My equity strategy is to remain fully invested with an underweight to the U.S.  I will continue to overweight International but shift to neutral on Emerging markets.  For fixed income, I will add to tactical bonds and continue my overweight in alternative investments.