Second Quarter 2015 Commentaries

We have just passed the midpoint of the year. In the tug of war between bulls and bears, the midpoint of the rope has hardly moved. For the first half of 2015, the S&P 500 moved within a narrow range of just over 100 points. It was up 1.23% in the past 6 months and 0.28% in the past quarter. Dividend accounted for nearly all of the gains.

“Those who live in a cold climate and in Europe are full of spirit, but wanting in intelligence and skill; and therefore they retain comparative freedom, but have no political organization, and are incapable of ruling over others. Whereas the natives of Asia are intelligent and inventive, but they are wanting in spirit, and therefore they are always in a state of subjection and slavery. But the Hellenic race, which is situated between them, is likewise intermediate in character, being high-spirited and also intelligent. Hence it continues free, and is the best-governed of any nation, and, if it could be formed into one state, would be able to rule the world.” Thus wrote Aristotle in book seven of “Politics” more than 2300 years ago.

Suffice to say that things have changed a bit over the past two millennia. The Greeks are once again in the news, not for their spiritedness and intelligence, but for their profligacy and delinquency. As the negotiation for the latest round of rescue package broke down between finance ministers of European Union and Greek government, markets around the world promptly sold off. Even in the distant shore of United States, S&P 500 was down by more than 2%, its biggest decline of the year. That turmoil in Greek should affect market in the US is tenuous at best. The economy of Greece is small and direct trade with United States even smaller, so direct contagion for the US economy is minuscule. Even for continental Europe, the size of the Greek economy is small enough that any contagion should be easily manageable. In addition, this latest Greek drama has been playing out for quite some time now. So any systematic exposure of European banks to Greek debt had long been extinguished. Rather Europe’s exposure to Greece is not economic in nature, but rather conceptual. If Greek does not belong in the European Union, then does Spain belong? Does Italy belong? Such are the logical questions that emerge.

For investors in the United States, there is a silver lining to the Greek drama. Given the uncertainty overseas, it certainly makes it more difficult for the Federal Reserve to raise interest rate. Low interest rate is the ultimate foundation of the current bull market. Therefore, the normalization of interest rate is also the greatest threat to this market. The Greek drama once again illustrates the difficulty of central bankers around the world of extricating itself from the low interest rate policy once the world economy had been attuned to such borrowing cost. That is a fact I believe the Federal Reserve is well aware of and explains the painstaking caution that they have taken to prepare for the initial rate hike. In turn, it explains the resiliency of the current market

Dong Hao Zhang
President & Chief Investment Officer Evla Hills Investment Management