Second Quarter Stock Market Review

Uncertainty is the watchword for 2Q2015 performance in stock markets worldwide. One driver of uncertainty is the revelation of dispersion among various global central banks. There is also uncertainty about the direction and implementation of the Federal Reserve’s policy. The level and direction of oil prices and energy availability is subject to uncertainty, too. The US economic growth rate and labor market recovery remain equally uncertain. Commodity prices and their direction and other such forces that lead to inflation or deflation compound the uncertainty. And, there is uncertainty about the financial sector and the debate among the leadership in the banking industry, not to mention the so-called leadership in the United States Senate. The list could go on and on.

These uncertainties keep the US stock market embroiled in turmoil and rocky volatility. The market has spent the first half of this year going nowhere. In the second quarter of 2015, the market indices may have seen a minor year-to-date increase or decrease, but the year-to-date fluctuation far exceeds the results from January to June of this year.

Stock markets can handle good news and bad news, but they do not like uncertainty. They have a problem when vital questions go unanswered, such as, “What will the outcome be, and when can we expect it?” or “How good or bad will the outcome be?” Those are key issues in stock market investing, whether the market is being impacted by a Greece-induced crisis or the dispersion of worldwide interest-rate policies. Thus the first half of 2015 has seen a rise in uncertainties and a flat stock market.

At Cumberland Advisors, we have maintained a relatively fully invested position in the US stock market. We believe that the enduring approach of discounting using interest rates is the primary factor in asset pricing. As this review is written, the short-term interest rate in many places in the world is near zero or even below zero. At the same time, longer-term and intermediate-term interest rates are in the low single-digits in most mature economies. Those interest rates suggest an upward bias in asset pricing that applies to all assets, including stocks in publicly traded companies. It also applies to real estate and collectible assets such as fine works of art. Asset prices rise when interest rates are low.

For the remainder of 2015, we look forward to emerging clarity on some of these issues. More clarity from the Federal Reserve before the end of this year is expected. Although it seems as though the Greek tragedy is perpetual, it cannot go on forever. The energy sector and the oil price will gradually find a better equilibrium as we get through the summer and as changes in the dynamics of energy extraction continue to flow through the energy patch, with positive benefits for the US and other economies.

Cumberland Advisors remains bullish in both the domestic and international stock markets. In keeping with the consistency of rising asset prices, when interest rates are low, we stay put.