The first quarter was really quite remarkable and included a number of “firsts”: the first instance of negative-yielding 10-year government bonds by a major economy (Japan); the first time in 13 years that WTI oil prices fell back to their 2003 levels (in January, and then again in February); and the worst first ten trading days of the New Year in history (as measured by the performance of the S&P 500). These are just a few examples of when a “first” is not a good thing.
While the S &P 500 and US Treasuries ended March with positive results, most other indices finished in negative territory. Simply looking at the end results of the first quarter of 2016 does not begin to tell the story. During the first six weeks of the year, the equity markets entered into sharp selloff only to be followed by an equally dramatic recovery to close out the quarter. In fact, even though the S&P index ended the quarter up 2.34%, the index was off as much as 12% during the middle of February, it was bumpy!
From a longer view, during the past 18 months the S&P has been range bound, trading between roughly 1,900 and 2,150 over that time. We believe that the 18 month time frame is an important reference point in the equation. 18 months ago, the Federal Reserve called off Quantitative Easing and has appeared to indicate the likelihood of tighter monetary policy including higher interest rates. Each time the Fed even enters into a discussion of the subject, the markets react badly. Unfortunately, the path ahead probably contains somewhat tighter policy and higher rates.
It’s not just in the US facing this bind. Central banks in general seem to be backed into a monetary policy corner. The European Central Bank, Bank of England, Bank of Japan and People’s Bank of China all seem to be fighting off economic stagnation with almost every bit of monetary policy that they can muster. The only real accomplishment from all that activity seems to be a standoff: things aren’t getting any worse, but they also are not getting significantly better. This is not an ideal situation and is certainly not favorable for producing stellar market returns.
Our outlook suggests that, in general, central bank monetary policy will remain rather loose on a global basis over the next year. Even in the U.S. it is unlikely that interest rates will be pushed higher in an aggressive manner. If we are wrong (and we don’t think we are), market participants may look back longing for the time that the S&P was range-bound. However, we believe that the Federal Reserve is mindful of this and will use care in managing both policy and expectations.
There were some economic bright spots in the first quarter. The US employment picture improved during the quarter with notable hourly earnings increases in January and March and large payroll additions in February and March. There was also a slow-but-steady increase in the labor force participation rate due to increased optimism about being able to find a job. This increased participation caused the official unemployment rate to increase to 5.0% in March after falling to 4.9% in January, but simply put, more people began looking for work, which is a welcome bit of news.
The end of the quarter also brought a handful of other positive indicators, including reports of modest gains in U.S. manufacturing growth courtesy of export orders and increased consumer optimism as measured by consumer confidence survey in March.. Finally, we saw revised fourth-quarter economic growth (GDP) register an annualized 1.4%.
While it was not a peaceful quarter, it was interesting. With the vote on Brexit looming, the second quarter also holds promise of being interesting. While the consensus seems to be that the UK will remain in the Eurozone, it is possible that is just wishful thinking. We will certainly be watching and contemplating the implications as the upcoming weeks unfold.
We hope you have a wonderful second quarter of 2016, please let us know if you have questions.
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