Market View (April 2016) – A Light at the End of the Tunnel?
Daniel Yu | April 28, 2016
Overview – Daniel Yu, CFA®, AIF®
Much like previous quarters, the first quarter of 2016 was interesting to say the least. The quarter began with concerns over the global economy. Was the precipitous fall in the price of oil an indication of a slowing global economy, or just an issue of over-supply? Would the Federal Reserve raise rates too quickly and choke economic growth? These concerns overwhelmed any positive news and equity markets declined through January and the first half of February. In mid-February the price of oil stabilized, and the focus turned to other economic factors including the actions of the European and Japanese Central Banks. In the US, economic indicators still pointed to overall positive economic growth and an improving job market. As fear subsided, participants returned to the equity markets with the S&P 500 finishing the quarter with a slight positive return. Having a diversified portfolio blunted the declines in higher volatility asset classes.
Equities – Daniel Yu, CFA®, AIF®
Volatility dominated the equity markets for the first half of the quarter. Oil supply and demand was seemingly disconnected as producers continued to flood the market with oil, while the world worried that lower economic growth was curbing demand. The price of oil fell quickly and as the market tallied how that would affect the profitability of the sector, savings from reduced oil prices did not seem to find its way into greater consumption. The S&P 500 declined 10.5% from the beginning of the year until February 11, 2016. However, the price of oil began to stabilize and as economic news continued to be positive on the whole, equities staged a comeback, with the S&P 500 finishing the quarter slightly positive. Emerging markets followed a similar track and also finished the quarter positively. he overseas, developed markets also staged a rally from mid-February onward, but still finished the quarter in negative territory.
Fixed Income – Clarence Hughes, CFP®, AIF®
The arrival of Spring has seen the Fixed Income markets affected by two factors: Oil and comments from the Fed. During March, comments from Fed officials about the coming of the next rate hike have edged Treasury rates higher. Oil, as priced by West Texas intermediate Crude Oil (WTI), closed briefly above $40 per barrel on Wednesday and pulled Treasury rates lower. We expect this volatility will remain in the Fixed Income markets as the markets adjust to the Fed’s move to ‘Normalize’ interest rates. We believe the likelihood of an April or June rate hike to be low. Solid demand and light issuance has helped the total return on U.S. investment-grade corporate and municipal debt, and we see this trend continuing through summer.
Alternatives – Daniel Yu, CFA®, AIF®
Commodities had a mixed first quarter of 2016. Precious metals generally moved upward, while agricultural products were relatively flat. However, it was oil’s continued decline that received most of the attention. Domestic producers continued to reduce rig counts, but continued their efforts to make each remaining well more efficient. In late January, prices began to stabilize. Oil finished the quarter lower than the beginning of the year, but above the January low. Managed futures generally performed as expected. While equity prices declined, managed futures were flat or positive. Despite a very challenging environment, some managed futures funds performed reasonably well.
On a brighter note, REIT total returns did generally outperform many major indices in 2015. The FTSE NAREIT index tallied a 5.84% return during the year despite ongoing fears of the Fed’s interest rate hike. Higher rates are a mixed blessing for REIT investors, as borrowing costs increase for operators and developers, but higher rates also mean higher rental rates and a potential increase in tenant quality.
Conclusion – Daniel Yu, CFA®, AIF and Clarence Hughes, CFP®, AIF®
Despite the volatile start to 2016, we believe the overall economic picture points to ongoing albeit slow growth. The Institute for Supply Management (ISM) readings for the Manufacturing and the much larger Services sectors both indicate economic growth, while non-farm payrolls continue to climb. Low energy prices should continue to add money to the wallets of average consumers which we expect to find its way in the form of greater consumption. Also, developed markets overseas continue to show overall growth. So we do see some light at the end of the tunnel, and it is not a train.
As in all market environments, there are areas of concern. Conflict in the Middle East is a perennial issue, and we have yet to see how much the return of Iran to global oil markets will affect the price of the ubiquitous commodity. The growth rate of the Chinese economy is also an area of concern. However, it does appear that fears regarding a slowing Chinese economy were overblown, as the Chinese continue their move to a consumer driven economy. The timing and magnitude of rate increases by the Federal Reserve are probably the biggest concern as many fear that low cost borrowing might disappear.
However, it is the low cost of borrowing that has contributed to some of the uncertainty of the investing public. When rates are low, those who seek predictable cash flows must reach out to more volatile asset classes to achieve a desired level of income. On the other hand each piece of news about an asset class is overly scrutinized as people attempt to avoid “the next big downturn.” These sudden movements of seeking return to avoid loss add volatility.
What can be done to help keep emotions from hijacking the decision making process? Perhaps three words can help: Budget, Plan, and Allocate. Budgeting helps you to understand your income and expenses and gives you a baseline of where you are financially. Not knowing where you are can lead to uncertainty and fear. Planning gives context because you are determining where you want to go, whereas not having a plan can lead to more uncertainty and fear. Being properly allocated helps mitigate some of the volatility in the returns of portfolio. Without budgeting and planning, one enters their investing mindset with a double dose of uncertainty and fear. No wonder long term asset allocation strategies are hard to maintain.
Perhaps it is time to re-evaluate what level of risk you want to accept in your portfolio. Perhaps you need to review your financial plan to determine if updates are needed. Perhaps you need help developing a budget. Perhaps you need help deciphering the meaningful economic news from the noise in the media. In each case, contact your Relationship Manager.
Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.