The quarter came to a close with a collective thud as global economic and political news shifted quickly to derail the stability of a composed investment narrative. Greece was a major cause of market anxieties at various points during the quarter and particularly in the last few days as the country announced it would default on its month-end debt repayment to the International Monetary Fund. The People’s Bank of China undertook a surprise rate cut alongside other easing measures as growth in the region began to slow and the sharp tumble in their local retail equity markets unnerved global investors. Meanwhile, Puerto Rican officials announced at the end of June that they would be unable to handle full repayment of their municipal debt. More broadly, the second quarter saw a continued focus on central bank policy and the market’s countdown to a Federal Reserve rate hike. Statements from the Fed continue to indicate that the current pace of economic improvements, should it continue, will warrant a hike later this year.

Non-U.S. developed market equities, as measured by the MSCI EAFE Index (USD), narrowly outperformed the S&P 500 Index for the second consecutive quarter with a meager 0.6% gain. The Eurozone economy has begun to show signs of life including an encouraging GDP report and positive inflation data as the new bond-buying program is in full swing. The market advance was the result of its two largest constituent countries, Japan and U.K., producing strong positive results. The Japanese market was supported by improved GDP figures and a slight decline in the Yen. The region representing the European Monetary Union declined 1.4% during the quarter as a stronger currency and financial turmoil in Greece sent waves through the market with investors quickly recalibrating their appetite for risk.

The S&P 500 Index, a broad measure of the U.S. equity market, posted a gain for the tenth quarter in a row. Reported earnings exceeded analyst expectations for 71% of the companies in the Index. The strength of the U.S. dollar against most major currencies faltered slightly during the quarter, but it still remains a formidable headwind for earnings. A stronger dollar dampens foreign earnings for U.S. companies and makes domestic goods potentially less competitive overseas. First quarter earnings growth came in well above expectations, but 0.8% growth failed to impress even the most bullish of investors. Small-cap stocks outperformed large companies for the third consecutive quarter. Small-cap companies tend to be more domestically focused and the negative impact of a rising U.S. dollar was less impactful on earnings. Investors showed a clear preference for growth-oriented sectors. Health Care and Consumer Discretionary were once again among the top performing sectors of the S&P 500 for the quarter.

Emerging market returns, as measured by the MSCI Emerging Markets Index, once again came in above their developed brethren with a 0.7% gain over the quarter. Performance across countries and regions varied widely during the period. A rebound in energy markets provided noteworthy tailwinds for Brazil and Russia while concerns of policy follow-through negatively impacted returns in India. Despite a flood of headlines and a notable drop of 5.6% in June, China turned in a strong 6.0% advance over the quarter. Investor sentiment vacillated as retail investors in the country’s local market were whiplashed by a liquidity driven retreat of over 20%. The People’s Bank of China undertook another surprise rate cut alongside additional easing measures as China’s economic growth has slowed and policymakers seek to contain overall credit growth to redirect the economy toward a more sustainable path.

After five consecutive quarterly gains, the Barclays Aggregate Bond Index declined nearly 1.7% as yields on the 10-year U.S. Treasury bond increased from 1.9% to 2.4%. A healthy economic backdrop domestically has bolstered sentiment that the Fed may begin raising rates as early as September. That said, U.S. bond rates remain higher than several other developed countries, which has helped maintain enough demand to prevent yields from rising rapidly.

The global bond market as measured by the Barclays Global Aggregate Index dropped 1.2% in value for the quarter. A stronger currency environment was not enough to offset the general increase in interest rates that pressured bond prices for much of the period. Eurozone rates dropped to all-time lows early in the quarter, but yields increased after Greece hit the headlines again. Yields increased the most in the southern region, primarily impacting Italy and Spain.

The high yield and bank loan markets provided the best results during the period as rates began to move upward and oil prices accelerated during the quarter. As default risks fell due to rising energy prices, the riskier fixed income sectors, high yield and bank loan, benefited as they tend to be more tied to the overall economy. Investors looking for yield returned to the higher yielding areas of the market as safer rates globally remained near historical lows.

The U.S. economy contracted 0.2% in the first quarter as harsh winter weather, port closures, and currency strength compressed economic activity. The unemployment rate dropped from 5.5% to 5.3% as job growth continued to exceed 200,000 hires a month. Wage inflation appears to be picking up, which is a signal that labor conditions are tightening. Consumer confidence remains at the highest levels since before the recession. The Federal Reserve is looking for signs that inflation is accelerating as policymakers weigh the timing of the first rate increase since 2006. Although inflation is rising it remains below the Fed’s stated target level.

The Eurozone economy expanded 0.4% in the first quarter led by gains in France and Spain. The bloc’s recovery has been led by its largest member, Germany, which has benefited from both reduced financing costs and the lower euro. The region continues to struggle with high unemployment, slow economic growth, and high debt levels. However, interest rates remain extremely low and the Euro has dropped against the U.S. dollar and this is fueling expectations that growth will increase in the coming quarters and the unemployment rate will begin descending.

Japan’s economy continues to climb its way out of a recession, advancing 1.0%, as the world’s third-largest economy continues to fight decades of deflationary pressures. The country’s economic stimulus efforts have resulted in a significant devaluation of the Yen, boosting exports and corporate profits.

As we enter the second half of 2015, two things have become abundantly clear; market volatility is on the rise and the Federal Reserve is on the cusp of a change in policy. The domestic economy continues to improve with support building in consumer spending, housing and manufacturing. Should inflation pick up, the Fed will be forced to make changes to the low-interest-rate environment that has been the hallmark of the economic recovery. The U.S. economy is still the most stable developed market and continues to grow at a measured pace. A resilient consumer, modest inflation, and low-interest rates offer support for current valuation levels. The earnings outlook calls for flat to negative earnings growth in the coming quarters. Equity valuations remain above average, suggesting performance should be primarily driven by earnings growth rather than valuation expansion. Some investors fear the strong dollar may impede the still-fragile U.S. recovery. While it is true that the strength of the U.S. dollar has depressed corporate earnings expectations, a strong dollar also offers some benefits. A stronger U.S. dollar makes imports cheaper and should provide a boost to consumer spending, which represents about 70% of the U.S. economy.

A weak euro, cheap oil prices, low-interest rates and a historic expansionary monetary policy from the ECB has the European markets pointing in the right direction after years spent in the long shadow of their U.S. counterpart. The Eurozone has adopted measures to boost prices and growth, most notably by agreeing to a substantial bond-buying program. Investing in the region doesn’t come without risk as Greece’s return to the headlines has the potential to unsettle markets. However, there is widespread recognition that the actual economic impact of a Greek default or exit from the Eurozone is far less significant than it might have been a few years ago. Greek debt is largely owned by public institutions that can presumably withstand a default. While the U.S. remains the most stable developed economy, the Eurozone has repositioned itself for growth and investors are beginning to move funds into the region on expectations of an economic recovery.

The story in emerging markets continues to center on energy prices and current account balances. The overarching landscape in Asia remains the most fertile with China and India positioned for attractive growth as they stand to benefit from the lower oil prices. Moreover, the governments in the region have been openly voicing their willingness to lend support if warranted. The recent challenges faced in China’s retail market have tested the mettle of the regimes desires to open to outside investors. That said, the response thus far has been swift and points to the exhaustive measures they are willing to entertain to keep China prime for additional future investment.

Global bond yields remain near the historically low levels reached in the summer of 2013. The Fed has indicated a desire to raise rates while Europe and Japan are embarking on additional stimulus efforts. There is a lot of uncertainty in the fixed income market as global government intervention is significantly impacting and possibly suppressing bond yields. Although bond yields could move lower, there isn’t much room to fall, which reduces the likelihood of significant bond price appreciation. Bond returns should be muted and could dip into negative territory in 2015 if the global economic growth surprises to the upside. When the Fed raises rates they will likely do so slowly and carefully and it should serve as an acknowledgment that the economy has strengthened enough to withstand higher interest rates.

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