Dear Mr. Market:
The first quarter is in the rear view mirror and what a wild ride it was! The stock market started the year with the worst first 10 days in history and we finally experienced a ‘textbook correction’ of over 10%. Perhaps the most shocking part is when it was all said and done, Mr. Market rallied in March to finish out Q1 just above break-even. Volatility like this is typically played out over a 12-month or longer cycle, not in one quarter.
The question that investors are currently asking is … how does the rest of 2016 play out? Turn on your television or open any printed material and you will quickly be overwhelmed with the various talking points. Just look at a few of the headlines that have popped up last week:
- Housing starts declined -8.8% in March.
- Auto sales fell at a -14.6% annual rate in Q1.
- Business investments in equipment fell -8% the first three months of this year.
- Large declines in military spending by the government in Q1 will add 0.1% percentage points to the real GDP.
- Industrial production dropped -0.6% in March coming in below consensus of 0.1%.
- Production of high-tech equipment increased +0.5% in March, up +2.1% versus a year ago.
These are real economic data points that have driven financial headlines over the last few weeks. In our opinion here’s what they mean (or don’t) and how we think the rest of 2016 will play out in plain English:
International Markets –
We have written several articles recently addressing the International Markets. Just last month we wrote about Emerging Markets and the impressive returns they have posted this year. The International bracket in our annual March Madness article featured emerging markets as they made a run all the way to the Final Four. This asset class appears to be assuming a leadership role much like it has in past market cycles. We believe what you’re seeing now is a classic “changing of the guard”. Why is it, however, that people seem to always want to sell at the worst time? Isn’t the old adage of “buy low sell high” more than just a saying? Many investors lightened their allocations exposure to International (both developed and emerging) based on 2015 performance. We aren’t overweighting this asset class but maintaining our allocation (as it dropped we bought more) and so far we are being rewarded for it. Don’t get us wrong…there is still plenty of risks and issues overseas but when an asset class gets overly punished the disciplined hand goes out and takes advantage of it. Over the last three months our core emerging markets position is up over 15%!
The Fed and monetary policy –
Any potential Fed moves will be scrutinized closely and drive the markets based on how the media interprets it. We have been at near zero interest rates for years. Listening to recent comments by various Fed presidents there is no question that the Fed wants to get back to ‘normal’ rates. Remind yourself that it’s not so much a matter of what they do but rather how they deliver their message and rationale. When a rate hike is announced (and it will happen) it should not strike fear into investors; historically the markets perform well when the Fed moves slowly like we expect them to do in this economic environment. A key factor that investors and the markets in general have completely forgotten is that the Fed does not manage the equity markets; they are responsible for monitoring and regulating the banking system, conducting monetary policy and providing certain financial services to the U.S. government & financial institutions.
Energy Sector –
There is certainly not a lack of opinions when it comes to oil and gas! In our Q1 2016 newsletter ‘the Guide’, we stated that we expected oil to recover from oversold conditions but remain range-bound. We clearly did not agree with the ‘doom and gloom’ crowd that was calling for $10 per barrel or less. We expected oil to rebound back to the $40 price range; currently it is trading around $43 per barrel. Expect to see more volatility in the price of oil in the coming months but overall moving in an upward price trend.
We could continue to address various talking points but let’s get back to the key question we mentioned earlier… where will the equity markets finish in 2016?
In a year where there is not a lack of headlines impacting the market we feel that investors need to be prepared for the S&P 500 to post returns in the positive single digits. We stated in our Q1 newsletter that we would not be surprised with returns in the 5% to 7% range. Keep in mind this was written at a point when the market was down -15% at one point! One common theme that we see taking shape this year is that investments that were perceived as being down and out in 2015 are now powering the markets in 2016. What this tells us is that unless you are incredibly lucky, or have a crystal ball, that stock picking will be very challenging in this market! Focus on your allocation and remain disciplined. A return in the 7% range is nothing to scoff at and will certainly help investors get one step closer towards their goals.
As we move through 2016 we encourage you to keep things in perspective and not fall into the trap of suffering from paralysis due to over-analysis! Remain focused and disciplined with your investment plan. If we can be of any assistance we encourage you to contact us with the form provided below.