Investors who only check market prices at the end of every quarter, may easily conclude the first three months of 2016 were uneventful, as stock market values finished March relatively close to where they began in January. However, as you are likely aware, global stock markets in early 2016 were unusually volatile, declining over 10% to start the year, then bouncing in mid-February and rallying through March, to end the first quarter recouping most of their earlier declines. As interest rates declined, bond investments delivered positive returns in the first quarter and helped cushion the stock market’s swings in our portfolios. After rising nicely in January and February, Gold has been able to hold its recent gains and once again, is viewed as a “safe haven” asset for many investors.
The major catalysts for the rebound in stock values include; a growing belief that oil prices have begun a sustainable recovery, better than expected economic reports, and supportive monetary policy announcements from the central banks of the United States, Europe and Japan. Janet Yellen reiterated, while acknowledging improvements in the American economy, she is also focused on weaker international growth and assured the markets that future interest rate increases by the Federal Reserve Bank will be slow and gradual. The markets were also helped in March, when Europe’s Mario Draghi, announced the European Central Bank would cut interest rates further and expand their bond buying efforts (Quantitative Easing) to keep their interest rates low.
Although encouraged to see the stock market rebound, we expect relatively weak first quarter corporate earnings results and more volatility in the second quarter. The trajectory of those earnings should improve as we progress through the year if the following two trends occur: oil prices continue to stabilize and the strength in the U.S. Dollar begins to abate. The magnitude of recent market swings has been dramatic and affirms our view we are in a risk-on/ risk-off environment, rather than one with a definitive positive or negative trend. That said, we see a low probability of recession over the next year and a global and U. S. economy that continues to grow slowly. Our economy is being helped by the combination of low mortgage rates and energy prices, low unemployment and finally some healthy consumer income growth.
The presidential election politics and distasteful mud-slinging will likely create uncertainty for investors as we progress into the summer and the party conventions. That uncertainty should dissipate as the election approaches and we get more clarity on the likely winner and the next resident of the White House. History has shown us that the sitting President’s political party has little impact on long term investment performance.
Market corrections are an inevitable part of investing. Our well diversified portfolios are designed to dampen the magnitude of corrections, in any and all markets, to tolerable levels so our clients can stay the course. We remain dedicated to assisting families meet their long-term financial goals and objectives.