1st Quarter 2016: Oh, What a Quarter!
April 1, 2016
Investors have been taken on a wild ride through the first quarter. There have only been eight other instances in which the S&P kicked off a year with such steep swings in both directions.
As of April 1, 2016 U.S. stocks ended the quarter modestly higher, which is a remarkable turn of events given the sell-off that kicked off 2016. The year began with growing concerns about the underlying weakness in the Chinese economy spilling over to concerns about emerging markets and global growth. At the same time, weak global demand and continued supply growth spelled trouble for crude oil futures as they plunged to the lowest level in years. Finally, investors were eyeing the U.S. Federal Reserve, which, having raised rates in December, indicated their plans to continue to do so throughout 2016 moving towards normalization of monetary policy.
But as the quarter progressed, these fears subsided and equities began to turn higher. China's market stabilized, oil producers began talking about freezing supply at current levels bringing crude prices off their lows, and both the U.S. and global central banks indicated they would remain in an era of very accommodative monetary policy.
The FOMC announced at its March 15-16 meeting that it now plans just two basis point (0.25%) rate hikes this year and that its long-run neutral fed funds rates is now 3.25%, 25 basis points lower than December 2015. These two shifts went a long way to resolving the imbalances that wreaked havoc on global markets at the start of 2016.
Yield is influencing stock buying as the S&P's top-performing sectors this year are telecom, utilities and consumer staples. These tend to consist of high-dividend paying companies that benefit most during slow-growth, low-rate environments, such as the current one.
On the fixed income side, a flight to safety sent the 10-year Treasury bond yield down to 1.83% from 2.24% at the beginning of the year and pushed bond indexes up (such as Barclays US Aggregate Bond Trust +2.99%).
Overseas markets lagged the U.S. for the most part with China and India equity categories falling -6%. The one surge, emerging markets (MSCI Emerging Market Index) had its biggest monthly gain since January 2012 fueled by a rebound of commodity prices and weaker dollar as the market reassessed the outlook for Fed policy.
We still believe U.S. stocks are in a secular bull market, but in a more mature phase with greater volatility swings. We remain disciplined and diversified as we watch to see if global growth can improve.