The first quarter of 2016 was a classic case of “backing and filling” as one week’s gains seemed to give way to the next week’s losses, which then formed a base for more gains. As much as we would all like to see the stock market, and by proxy our portfolios, continue a calm and steady increase from month to month and year to year that is not the way it works. Equity markets do go up over long periods of time as the underlying companies they represent grow and participate in our national and international economies. However, in the short run, it’s anyone’s guess as to what direction the markets will take.
The broad market started rolling over in July of last year dropping -12% before forming a base in August, and finished the year’s final quarter with impressive gains. Unfortunately, as we started the new year, investors’ hopes for continued positive momentum were dashed as the market headed straight down in one of the worst opening weeks in history. By the time the dust settled in mid-February, stocks had fallen another -12%. However, from then to the end of the quarter, the negative momentum reversed and the market ran off an impressive string of weekly gains, climbed another wall of worry and closed out the period with meaningful returns.
Economic and Market Update
The aforementioned wall of worry included concerns over Federal Reserve monetary policy, a slow-down in China’s economy, sabre rattling by North Korea, a break down in relations between Saudi Arabia and Iran, continued stress in the oil and gas markets, and numerous terrorist attacks. The world’s second largest economy, China reported a slowdown in its growth rate to a 6-7% annual pace. In an illustration of just how connected our world has become, China’s slowing growth resulted in a sell-off in the shares of Apple Computer since China is its second largest market for the iPhone. Apple reported its slowest growth in phone sales since introducing the iPhone in 2007 and briefly lost bragging rights as the world’s most valuable company to Google (now called Alphabet) but has since reclaimed the top spot.
Back home, the third and final reading of 4Q GDP (Gross Domestic Product) came in at 1.4%, which, although not great, was higher than previous estimates. For the full year of 2015 our economy grew 2.4% (net of inflation). 1Q GDP numbers aren’t yet available, but the latest estimates are for growth to come in around 1.5% annualized. Our economy continues to grow (albeit at a slow pace) due to a robust housing market and the U.S. consumer whose willingness to spend remains undeterred. Consumer spending rose 3.1% in 2015, the fastest pace in ten years. That confidence to spend is being boosted by a continually improving employment picture. Numbers just released for March showed a gain in non-farm payrolls of 215,000 jobs and a slight uptick in the unemployment rate to 5% as more people started looking for a job. On the negative side, company profits and capital spending are both falling, primarily due to uncertainties surrounding our international trading partners.
Stocks and Bonds
Stocks posted decent gains for the first quarter of 2016, but investors had to stay below deck as any untethered passengers were very likely thrown overboard during the quarter’s rough seas. Domestic markets were led by mid-cap companies (S&P 400) up 3.7%, followed close behind by small-cap stocks (S&P 600) up 2.7%. International markets posted mixed results with the previously battered emerging markets (MSCI EM) gaining 5.4%. Developed international markets (MSCI EAFE) was the only major market that did not see gains during the quarter, losing -2.5%. A strengthening dollar, falling commodity prices and fears of deflation created headwinds for many developed countries. Our bond benchmark (Barclays Capital Government/Credit 1-5 Year) posted returns of 1.6% for the quarter, as the slowing economic outlook produced lower yields and a corresponding rally in bond prices.
What’s Next?
Worry if you must, but it does no good. The markets are going to do what they are going to do and no one can predict with any degree of consistency the short-term direction of any stock, commodity or sector. No one can predict what interest rates will do either. As an example, contrary to most experts and market pundits’ predictions, interest rates are lower today than when the Federal Reserve raised the Federal funds rate a few months ago. Investment strategies built on premises of predictive capabilities may work for a while but they eventually breakdown and in so doing can wreck years of prudent saving. Long-term, equity prices are a function of earnings and inflation, and as much as everyone wants to worry about China, it only accounts for 1% of U.S. GDP and only 2% of the S&P 500 companies’ earnings. With our economy growing at a slower pace, earnings estimates have been falling and inflation is still below the Fed’s forecasts.
The important thing to worry about is not if Apple or Google will be the world’s most valuable company, (frankly, I could care less) but rather, if you are going to have enough money to fund your life’s goals and if you are taking too much or too little risk in the interim. The only way you can answer these questions is through a detailed analysis of your goals and the resources required to fund those goals. Anything less is comparable to throwing darts. The professionals at Wealthview are looking to develop relationships with investors who understand that there is a correlation between planning and results. We help our clients create plans that offer a reasonable probability of success, at reduced costs and without unneeded risk. We then prudently manage the resources needed to fund their goals. And finally, we remain available to provide on-going advice. We’re Wealthview, it’s what we do!
Best wishes for a beautiful spring.
-Sam