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Market Insights - April 2016

A steep slide down, then back to the beginning.

Investors began 2016 with great expectations, only to be overcome by a miasma of despair, as shares collapsed into correction territory within the first few days of January. It was a mix of one part China, one part Fed fears, and one part free falling oil prices, with equal measures of a struggling Europe and Japan thrown in. Fast forward to February 12, Lincoln’s birthday. With no real change in fundamentals, investors looked up and realized the sky wasn’t falling. The S&P 500 leapt 12.6% through the end of the quarter, one of the fastest rises in decades, ending a little above where it began on New Year’s Day, and within a few percentage points of its 52 week high. Most other averages followed. Emerging markets were the strongest major asset class, rallying up over 5%, while small and mid-cap stocks added 2.89% and 4.32% respectively. Global developed markets lagged; the EAFE developed market index lost 3.7%, while biotech stocks, despite an impressive rally off their lows, still lost a fifth of their value. So went the correction.

The fixed income portion of our clients’ portfolios contributed to returns in several areas. First, U.S. Government bond and investment grade corporate bond prices were lifted early in the quarter as investors sought a safe haven.  Then, as credit fears eased, high-yield bonds staged a comeback. Interest income, as always, continued to provide cash flow for withdrawals and reinvestment. 

The near term

It will be down to corporate earnings to keep this rally alive in the months ahead. While consensus estimates for S&P 500 profits this past quarter suggest an overall decline of 8.5%, much of that is due to the energy sector (more than 8% of the S&P 500,) with profits down as much as 90%!  Expectations are that second quarter earnings will be also be lower, by about 3.5%. Real profit growth won’t resume until the latter half of 2016. With the bar set so low, companies are likely to surprise more on the upside, giving some lift to stock prices, although the calm markets of late may not continue through earnings season. We still anticipate mid-single digit returns for the calendar year.

A little further out

A positive environment for the global balanced approach we favor seems increasingly likely in the next 24 months. For 2016, the World Bank estimates global GDP growth at around 2.7 percent. U.S. interest rates can easily remain below the 2.5% level on the ten year bond (now 1.8 percent) if moderate GDP growth continues and inflation targets are met. Fed Chairman Yellen, in her most recent series of speeches, has outlined a cautious and data sensitive approach to monetary normalization. Jobs are being created at a steady and sustainable pace, the labor market participation rate is higher than it has been in over two years, incomes are finally rising, and consumer revolving debt is falling. We know from past experience that the positive effects of lower oil and gas prices are likely to show up in consumer spending this year and next.

But what about the election?

In speech after speech our candidates inveighed against the State of the Union, each with their long list of what is wrong with the United States, and how far we’ve fallen as a country. Their hyperbole seems slightly ridiculous. In fact, the endless drone of complaining presidential hopefuls may have helped set the pessimistic tone that ushered markets down in January. In fact, markets tend to do well in election years, no matter who wins. Over the last 21 election years the S&P 500 has posted positive returns in all but three. And if these patterns mean anything, consider this; on average, stock market returns in the last year of a presidential term have been twice the returns of the first year of that term. Well, in 2013, the first year of this present term, the S&P gained a whopping 32.4%!

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