Market Review & Outlook

- 2016 1st Quarter

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Global Markets: Neutral 

There is so much happening in the world this quarter that it is difficult to pinpoint a primary driver. Emerging markets quietly led the way in performance, after several years at the bottom as talks about trouble in China have turned to more clear site lines to their growth prospects in the near term. Energy prices rising benefit international producers, while world interest rates, remaining historically low to negative, make money to grow cheaper than ever before. Nonetheless, terrorism, shaky recoveries, and a world holding it’s breath for what happens next in the U.S. counterbalance these improving criteria. 

U.S. Economy: Good with Caution

U.S. Economic data continue to be healthy, although sentiment remains very cautious. Despite the noise of the markets this quarter, we are still in the midst of an expansion. As reported in previous quarters, job creation continues, housing starts are still climbing toward a more normal range, and credit usage is increasing. The consumer is still maintaining an above average savings rate. Corporations also continue to spend and hire but still maintain high levels of cash, frequently now being deployed in share buybacks and M&A activity. There is some weakness in the manufacturing sectors. Earnings in 2015 aren’t predicted to be outstanding, but there is also no anticipation of poor earnings.

Inflation: Good

Inflation continues to be well below historical averages. Despite an increase in energy prices, we still see low interest rates, low cost manufacturing, and other factors indicating low inflation. The rate of inflation remains predicted to stay at about half the level of a historical norm. 

Interest Rates: Neutral

Under broadening criticism, Yellen has explicitly indicated that she will be very slow in normalizing rates. While the street predicted anywhere from 3-5 raises in the near term, everyone is now agreed that we will be lucky to see 2 raises through the end of 2016. While in the past this suppression of normal rates was seen as a positive for the economy and markets, now more and more it is seen as a lack of confidence on the part of the Fed, and a headwind to improving margins in the financial sector, which is a huge part of U.S. earnings and stock market performance. 

U.S. Stock Market: Good with Caution

This quarter has been nothing short of a hair raising wild ride. If the investor simply checked their quarter end statement they might say, “Gee, not much happened here.” However, the S&P experienced the worst first few weeks in history, bottoming out in the second week of February down over 10%. Fortunately the bottom was found and the market has fully recovered leaving us to ask, “What just happened?” There’s no simple answer, except to say that the market abhors uncertainty, and that’s just what we have a lot of right now; earnings, interest rates, energy prices, world stability, and politics are all unpredictable. Despite some underlying firmness in the data we usually track, the overriding fear of something unpredictable occurring, like $20 oil, negative interest rates, terrorist activity, and upheaval in Washington all pressure the markets to whip around. As these variables become more predictable, the markets will adjust.

Historically election years have not been great for U.S. markets, and this one doesn’t look like it will be different, especially given the vastly different policies of the remaining candidates. As the field continues to narrow, corporate America and the taxpayer will better predict the economic impact of the impending political change. 

Now more than ever it is important for investors to stay disciplined in their allocations. The temptation that an investor has to “do something” when the markets get ugly may repeat through the rest of the year It will remain critical to steer back to the reasonable course. If nothing else, the last quarter gives us a great example to reference which can remind us of the power of not reacting emotionally to volatility. It is not predicted by many that 2016 is going to be a great year for the markets, nor is it predicted to be bad. What most analysts are looking for is mid single digit increases among quality names. 

U.S. Bonds: Cautious

With the slower pace to normalization and a general flight to safety over the last quarter, bonds showed strength. The 10 year ended the quarter at 1.78%2

, vs an historical average of 6.21%. What the investor has seen is that despite the actions of the Fed, interest rates and bond prices have been very volatile. As such, it is critical that the right fixed income manager be selected to mitigate that risk. Credit quality, duration, security type and yield will help to temper the effects of rising rates. 

Allocation Comments

It is important for investors to maintain exposure to all asset classes, even in this tougher environment. Selective large cap U.S. Growth should reward investors, as managers seek quality, earnings, and leadership as criteria for inclusion in a portfolio. Any hope of outperformance will come from good asset selection. All eyes are on earnings, which should reward those companies that get it right. In addition, it is important to recognize that after several years at the bottom of performance, emerging markets is showing signs of life. Funds with an allocation to EM will show the effects of this swing. Finally, real estate shouldn’t be ignored. Including a REIT fund, or a REIT allocation in a larger fund is a good way to expose the portfolio to yield as well as benefit from a more stable and growing real estate market. 

[1] YTD 2016 Total Return data sourced from and
[2] Source: JP Morgan Guide to the markets, Q2 2016.

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