Spring has arrived here in the Bay Area and across most of the nation. Just as we have seen declining rainfall after the wintery “El Nino” conditions, the new season has recently brought a break from the significant volatility we experienced in the first two months of the year.
However, although there is increased clarity on several issues that cast a cloud (was it the El Nino effect?) of uncertainty over financial markets in January and February, it would be unwise to forget that heightened volatility is likely not gone for good.
The first quarter of the year was historic. After being down more than 10% at its lows, the S&P 500 bounced back in March and finished the quarter positive. The S&P 500 hasn’t erased a 10% quarterly loss to finish positive since the Great Depression.
Experiencing market volatility like this is not easy; yet witnessing this kind of reversal reminds us of the importance of maintaining a long-term perspective. So, what changed between January and February and today to help calm markets?
The mid-winter market malaise largely revolved around the Federal Reserve (Fed), China, oil, corporate profits, and the U.S. dollar. Investors were likely concerned that the four 25 basis point (0.25%) rate hikes the Fed projected for 2016 would lead to a recession and exacerbate the imbalances emerging in the global economy.
These imbalances stemmed from a series of missteps by Chinese policymakers, the oversupply of oil, weak corporate profits, and unprecedented strength in the U.S. dollar. In the past couple of months, many of these issues have started to resolve.
At its March policy meeting, the Fed changed its tune slightly from the December 2015 meeting and reduced its forecast for rate hikes this year from four to just two, citing concerns around global imbalances and economic growth. This more market-friendly projection helped to push the dollar lower and oil higher, alleviating some stress in global financial markets.
Meanwhile, China, which said or did all the wrong things managing its currency, economy, and financial markets during the second half of 2015 and again in early 2016, has mostly turned that around recently. The weaker dollar, soothing words from China, and the rebound in oil prices helped to renew a slightly more positive corporate profit outlook and sparked an impressive market rebound.
After the market dips, reversals, and dramatic shifts in investor sentiment, what can we expect as we look ahead? In my opinion, the second quarter of 2016-and the rest of the year-may look a lot like the first quarter, as many of the areas of concern we faced (such as Fed rate hikes, oil prices, earnings declines) remain in the background.
Although it is very possible that the heightened volatility throughout the rest of 2016 might continue, some investment management firms, including the LPL Financial Research department, think that the broad US equity market might deliver mid-single-digit returns in 2016 if the U.S. economic expansion continues. Only time will tell whether these prognostications will come true.
To help you maintain perspective and stay on track, please feel free to browse on the right my previous newsletters and a sample of the educational articles from the blog section of my website. And, as always, if you have questions or are seeking clarification about your current situation, please email me at firstname.lastname@example.org or call me at (925) 464-7057.