Happy 4th of July Weekend. I hope everyone is having a great time.
The second quarter came to an end on Thursday. The action was a little bumpier than the first three months of the year. Unlike the first quarter, – U.S stock performed better than international stocks. Global bonds were weak across the board compared to last year. Overall it wasn’t a great quarter for stocks or bonds.
Let’s take a look at some comparisons. Here is a look at global equity markets ranked by quarterly return.
For the second-quarter from April 1 through June 30.
- S&P 500 (SPY): +.43%
- AIA Asia 50 (AIA): -.08%
- VT Total World Stock Market Index (VT): -0.29%
- Europe (VGK): -1.77%
- South America (ILF): -2.83%
- Emerging Markets (EEM): -3.54%
- Africa (AFK): -6.97%
- Australia (EWA) : -7.76%
Year to Date Results.
- Asia 50 (AIA): +7.69%
- Europe (VGK): +3.55%
- Total World Stock Market (VT): +2.89%
- Emerging Markets (EEM): +1.25%
- S&P 500 (SPY): +.86%
- Australia (EWA): -3.52%
- Africa (AFK): -5.86%
- South America (ILF): -6.07%
Each of these Funds also Pays a Dividend
Keep in mind, all of these funds pay dividends too. International stocks and funds pay the best dividends. Take a look at how they rank.
- Australia (EWA): +4.80%
- Africa (AFK): +3.52%
- Europe (VGK): +3.28%
- South America (ILF): +2.47%
- Total World Stock Market (VT): +2.28%
- Emerging Markets (EEM): +2.12%
- Asia 50 (AIA): +2.01%
- S&P 500 (SPY): +1.87%
Here’s a chart I have shared before that shows global dividends by country. This is one of the reasons I am an advocate of international stocks.
Lets Take a look at Some Bond Funds
Bonds didn’t have a great second quarter. The main reason? When interest rates rise, bond prices go down. With the market speculating that the Fed will raise interest rates in the second half of the year, a lot of capital flowed out of bonds. Take a look below at how the major bond categories performed during the second quarter.
Second Quarter
- Emerging Market High Yield (EMHY): +.44%
- Short Term 1-3 year Treasury Bond (IEI): -1.09%
- Treasury Inflation Protection Bond (TIP): -1.68%
- High-Yield Corporate Bonds (HYG): -1.89%
- Emerging Market Bond (EMB): -2.55%
- Medium Term 7-10 year Treasury Bond (IEF): -3.46%
- Investment Grade Corporate Bonds (LQD): -5.12
- 20+ Year Treasury Bond (TLT): -10.72%
Year to Date
- Emerging Market High Yield (EMHY): +1.81%
- Short Term 1-3 year Treasury Bond (IEI): +.44%
- Emerging Market Bond (EMB): +.24%
- Treasury Inflation Protection Bond (TIP): +.11%
- High-Yield Corporate Bonds (HYG): -.95%
- Medium Term 7-10 year Treasury Bond (IEF): -1.25%
- Investment Grade Corporate Bonds (LQD): -3.31
- 20+ Year Treasury Bond (TLT): -7.82%
These Bond Funds also Pay Dividends
Similar to the stock funds mentioned above, these bond funds also pay dividends. Here’s how they rank in terms of dividend yield. Emerging market bonds pay some of the best dividends. They are also considered to be riskier than treasury bonds.
- Emerging Market High Yield Bond (EMHY): +6.06%
- High-Yield Corporate Bonds (HYG): +5.37%
- Emerging Market Bond (EMB): +4.31%
- Investment Grade Corporate Bonds (LQD): +3.37%
- 20+ Year Treasury Bond (TLT): +2.70%
- Medium Term 7-10 year Treasury Bond (IEF): +2.00%
- Treasury Inflation Protection Bond (TIP): +1.43%
- Short Term 1-3 year Treasury Bond (IEI): +1.29%
Despite Volatility, I Remain Bullish on both Stocks and Bonds
Despite the lackluster results in the second quarter, I am still bullish on both stocks and bonds. I see three short-term catalysts.
1.) The Fed will not raise interest rates: With Greece falling apart, I believe the Fed has the excuse it needs to hold off on raising interest rates. If a rate hike gets pushed back to 2016, that will send a lot of fresh cash into stocks and bonds.
2.) Greece will remain in the EU: Greece is making the market nervous. It is causing a lot of uncertainty. I believe Greece will remain in the EU. Although that is the wrong decision for Greece, it would be very well received by the Street and send stocks and bonds jumping higher.
3.) Europe and China Central Banks are Flooring it: Both Europe and China are heavily stimulating their economies.For the first time ever, Europe just launched a stimulus program called quantatative easing (QE) where it is going to purchase $1.2 trillion in European bonds in the next two years.
I expect this program to send a tidal wave of cash into European stocks and bonds – and stimulate broader interest in foreign stocks and bonds as well.
For a deeper look into this program, check out this article I just wrote for Street Authority. As the Chief Investment Strategist of their international investing services, I wanted to get the word out that European QE was an important event to pay attention to.
The $1.2 Trillion Dollar Trade that Could Boost International Markets
China’s central bank is also buys. It just lowered margin requirements for big banks and lowered its key lending rate. The Chinese central bank is also now actively buying Chinese stocks to support the equity market. That is big news in the world of stock investing.
I expect all of these events to be good for stocks in the short run. And in the long I expect international stocks to deliver better returns that U.S. stocks for two reasons.
1.) International Stocks Pay Better Dividends: Since 1900, dividend payments account for approximately 40% of the U.S. stock markets total return. Right now, as showcased in the chart above, international stocks pay much better dividends than U.S. stocks.
With 10,000 baby boomers retiring everyday – there growing demand for high income investments. In the past, retireess simply had to purchase t-bills paying 6%-8% to pick up an excellent yield. Today, interest rates are at a record low and these same retirees are increasingly looking aborad for income opportunities. That includes both stock and bonds.
2.) International Stocks are Undervalued – Especially Emerging Markets
Robert Schiller is a Nobel Prize winning economist. His cyclically-adjusted P/E ratio, adjusted for market cycles over a longer period of time, is commonly referred to as the CAPE ratio. Currently, the United States has a CAPE ratio of 28 – a sharp premium to some of the highest-growth emerging markets in the world. Take a look below.
Emerging markets are even more undervalued. The iShares Emerging Markets ETF (EEM) has a P/E ratio of just 14 compared to 19 for the S&P 500.
So as you can see, there are still plenty of reasons to be optimistic about stocks and bonds despite the latest menu of threats.
I am in the process of sending out 2nd quarter and full-year performance reports. In the meantime if anyone has questions as always feel free to say hello.
Your Investment Partner,
Mike
