If an investor were to look at just the starting and ending index values for equities, it would show a quiet quarter with equities posting a very modest gain for the 1st quarter. The S&P 500 finished up 0.77% on a price only return basis. Looking deeper, however, reveals that investors were taken on a very wild ride, driven by fears of both a global and domestic recession, which saw equity markets sell off substantially and enter correction territory. Some of the notable headlines from the quarter included:
“China Market Drop Leads to Worries of Further Turmoil”
“Dow, S&P Off to the Worst Starts Ever for Any Year”
“Oil Skids to 12-Year Low”
“Iran Sanctions End as Deal Takes Effect”
“Bank of Japan Introduces Negative Interest Rates”
“Nikkei Posts Largest Weekly Percentage Drop since Financial Crisis”
“British Pounds Sinks to Seven-Year Low on ‘Brexit’ Fears”
It’s no wonder investor emotions were on high alert during the 1st quarter. The markets experienced a sharp divide between fear and fundamentals. As economic data began to grab attention, brighter headlines began to emerge.
“US Budget Deficit Falls to Lowest Level since August 2008”
“US Economy Starting 2016 on Solid Footing”
“Net Worth of US Households Rose to Record $86.8 Trillion in Fourth Quarter”
“S&P 500 Turns Positive for the Year”
To start the year, the S&P 500 fell over 10% in the first 3 weeks of January. A late month rally failed to hold, with stocks dropping further, bottoming out on February 11th with an 11% decline year to date. This drop represented a 14% drop in the index from the May 2015 closing highs. February 11th has been called the “Jamie Dimon Bottom,” as Mr. Dimon, CEO of JP Morgan, purchased 500,000 shares of his company that day, in a show of confidence. A market rally ensued, advancing 14% to close out the 1st quarter in the green, at an index value of 2060.
International stocks, as represented by the MSCI EAFE index, fell -3.74% during the quarter. In similar fashion, the index fell over 12% to start the year, before rebounding over 11% to end the quarter. Emerging markets were a bright spot in the market, advancing 5.37%, aided by a weaker U.S. dollar.
Interest rates generally decreased across the US fixed income markets during the quarter. The yield on the closely watched 10-year Treasury note fell 49 bps to 1.78%. Bond prices on longer dated bonds are more sensitive to interest rate moves, and therefore long-term corporate bonds gained 6.83% compared to gains of 2.76% and 1.16% for intermediate and short-term corporate bonds respectively.
The Federal Reserve remained dovish at their March meeting. Forecasts for interest rate hikes for this year moved to two, from four. The dovish tone, coupled with concern over global growth, led to a rally in the overall fixed income markets. The Barclays US Aggregate Bond index advanced 3.03%. High Yield bonds rebounded nicely, finishing the quarter up 3.35%. Municipal bonds continued their winning streak, advancing 1.67% to start the year.
Alternative & Commodity Update
Real Estate Investment Trusts (REITS) outperformed the broad market indices. Global REITS posted very strong performance for the quarter, increasing an impressive 8.60%. US REITS also fared well, posting solid gains of 5.12%.
On the commodity front, precious metals led the way with gold gaining 16.40%, and silver following right behind with a gain of 11.87%.
WTI Crude Oil has had a volatile 1st quarter of trading. Crude oil closed at 37.13 to end 2015. WTI Crude closed at a price of 36.94 to end the first quarter, but like equities, oil fell sharply to start the year. The spot price fell to a low of 26.19 on February 11th, and hit a high of 41.45 on March 22nd.
As can be seen from this chart, the movement of the equity markets is still very highly correlated to the movement of the price of crude oil. Continued volatility in the energy markets is sure to carry over into the equity markets throughout the rest of the year.
(The following is an excerpt from Liz Ann Sonders, Chief Investment Strategist; Brad Soresnon, Managing Director of Market and Sector Analysis; and Jeffrey Kleintop, Chief Global Investment Strategist – Charles Scwhab & Co.)
We believe 2016 is shaping up to be much like the first quarter, volatile at times but generally trending higher. As long as the oil/stocks correlation remains elevated, continued improvement in the stock market may hinge on the path of oil prices. With oil inventories at historic highs and the ability of oil rigs that have been shuttered to restart in relatively short order, it’s tough to paint a picture of oil moving substantially higher from here over the course of the year. However, as we’ve noted before, gross domestic product (GDP) growth has typically been boosted by a fall in oil prices with about a year lag, which could bode well for potential upside surprises in 2016. However, companies remain cautious and apparently reluctant to spend on capital improvements to any great degree. Their preference appears to be adding to the labor force as 215,000 jobs were added during the month of March. The calculation appears to be that given the uncertainty of economic developments, companies believe it is easier to lay off employees if necessary, rather than trying to get rid of equipment at fire sale prices. All of this plays into the upcoming earnings season, which is projected to be relatively weak, with another negative growth rate expected. This sets up the potential for upside surprises, but with stocks at what we consider about fair value, stronger earnings are likely needed before stocks can move demonstrably higher.
CRA FINANCIAL LLC