The markets have gone mostly nowhere over the last year with a small decline in overall prices, after falling and rising like a yo-yo. There were two back-to-back market corrections over a period of six months. The first was in August 2015 when we had a market correction of -12.4%. The second correction started at the beginning of the year, and lasted until mid-February declining -13.3%. Clearly, the global markets have been roiled by significant volatility over the last twelve months.
Economically, the world is in a painfully slow-growth environment. As such, any negative information can send the markets into a short-term frenzy. Much of the commotion over the last year can be attributed to a slowing China, the crash in commodity prices and the Fed raising interest rates.
So where are we now? The economic indicators are signaling continued growth, just at a very slow rate. Interest rates are low, and most of the central banks have little latitude to raise them substantially in the near future. Oil prices have bounced off the bottoms, but are significantly lower than they were a couple of years ago. Inflation has remained low, and shows only a modest hint of increasing. Unemployment is down to pre-financial crisis levels, which means businesses and consumers are well off. More importantly, both businesses and consumers have an abundance of cash socked away which can provide further impetus for higher stock markets.
So where do we see things going? With the above backdrop, as long-term investors, we should be rewarded in equities. Bonds will have a more difficult time, as there will be a slow incremental rise in interest rates as the Fed seeks to return to normal levels. Cash will be tough to hold as rates are low and it will be some time before they return to more saver-friendly yields. Our economy could have further improvement in growth rates with fiscal debt reduction and tax relief.
For more details on the last year, please feel free to review the remaining information below:
The first ten days of 2016 was the worst start in history. By mid-February, the markets had corrected a little over 13%. Since then, markets have bounced back to where they began the year (See chart below). The 2016 stock market pullback marks the second correction in just six months. This is noteworthy because there have only been three back-to-back corrections of this nature in the last 100 years.
S&P 500 PRICE CHART – ONE-YEAR ENDING MAR 31, 2016
Large Cap stocks were mostly flat over the last year turning in a positive 1.2%, and were up 0.7% for the 1st quarter (as measured by the MSCI USA Large Cap Index). Small Cap stocks were extremely volatile over the last year. From the highs in June 2015, they were off significantly, falling approximately 26% to the lows in mid-February 2016. Notwithstanding the gyrations, Small Caps (as measured by the MSCI USA Small Cap Index) were mostly at a break-even for the quarter with a small 0.9% increase, but were still down -7.3% for the last twelve months.
Our foreign counterparts experienced similar volatility. International stocks (as measured by the broad based MSCI EAFE Index) had a -2.9% return for the first quarter, and a significant loss of -7.9% for the last twelve months. The Japanese markets fell -6.8% for the year (as measured by the MSCI Japan Index) and were down -6.4% for the quarter. Europe (as measured by the MSCI Europe Index) was down for the year with a -8.0% return, and was off -2.4% for the first quarter. Asia stocks (as measured by the MSCI Pacific ex-Japan Index) rebounded with a positive return of 1.8% in the first quarter, but still suffered a -9.5% loss for the year reflecting China’s influence over the area.
Sector returns varied greatly and were not immune to the volatility. The best performing asset class over the last year was the defensive asset class of Utilities (as measured by the MSCI USA Utilities Index) which rose 13.3% and was up 15.2% for the first quarter. Utilities were actually down almost 7% in 2015, but rebounded as investors moved to defensive positions in the first quarter of 2016.
Precious Metals rebounded (as measured by the MSCI ACWI Metals and Mining Index) in the first quarter moving up 20.3%, but still showed a decline of -22.9% over the last twelve months. Precious Metal stocks have bounced up over 100% from the lows in mid-January as commodities surged in the first quarter. Likewise, energy stocks pulled ahead in the first quarter as oil prices rose off the lows. The energy related stocks (as measured by the MSCI World Energy Index) turned in solid returns of 5.4% for the quarter, while still down over the last twelve months with a -14.8% decline. Healthcare stocks (as measured by the MSCI USA Healthcare Index) retreated with a -6.2% return for the quarter and declined -6.7% for the last year. Lastly, Technology performance (as measured by the MSCI USA Information Technology Index) was mostly flat with a 1.8% return for the quarter, and up 5.6% for the last twelve months.
Bonds did fairly well in the first quarter of 2016 as interest rates subsided reflecting fears in the global markets. Bonds were the investor’s safe haven in light of the global equity markets sudden decline. The Barclays US Aggregate Bond Index was up 3.0% for the quarter, and 2.0% for the last twelve months. The Fed has been speaking of raising rates, but with slowing economic activity, they put a hold on near-term rate increases.
The economic perspective depends on what part of the globe is being evaluated as each area is moving through different phases of the economic cycle. All of the U.S. economic indicators are showing positive, but slow improvement. The U.S. continues in its slow growth pattern where GDP is not likely to go above 2% this year. Notwithstanding, U.S. unemployment stands at a reasonable 5.0%. China on the other hand, is struggling to keep their growth stable while fighting some major headwinds. Europe is still working to come out of the severe recession with persistent high unemployment and very slow GDP growth. The Euro Zone turned in only 0.3% GDP growth and unemployment has remained high (still averaging over 10%). Lastly, Japan is struggling to have GDP growth above the flat-line, and the most recent quarter turned in a negative 0.3% GDP growth rate.
Please let us know if you have any questions on the overall strategy and holdings in your personal portfolio. We are always happy to chat about your individual financial situation. As always, we greatly appreciate the confidence you have shown in our services. We thank you for your business!
Bijan Golkar, CFP®