“When I was a kid I got no respect. When I went on the roller coaster, my old man told me to stand up straight.” Comedian Rodney Dangerfield
The first quarter of 2016 gave investors a jaw-dropping ride that reminded us of a rollercoaster. Stocks, U.S REITS and oil fell into correction territory during the first six weeks of the new year through February 11, only to sharply rebound for the next six weeks to the quarter’s end. A rollercoaster ride is a great analogy for many things in life, including the markets, but we do not offer the same advice to our clients as Rodney Dangerfield’s dad. The thrill ride will be our guide this quarter.
Concerns about oil’s continuing slide, slowing global growth and a misreading of China news contributed to the year’s rocky start. Recession fears, some of which were promoted by leading market pundits, rose to an almost fever pitch. This pushed risk assets to sell off sharply; then, just as crisis fears were peaking, a relative bottom formed and the market rebounded. Here’s a return summary of the quarter:
As we’ve been writing for a while, the global markets are processing a lot of new data; uncertainty, the market’s enemy, is very high this late in the recovery cycle from the Financial Crisis. One pundit has described the market’s focus areas as the ‘Three Cs’: commodities, China and central banks. Let’s look briefly at each:
- Commodities of all types – industrial metals, precious metals, oil – have been buffeted by a number of factors, primarily slowing global growth and an oil war with OPEC producers. Signs of a bottom for oil, a weakening in the U.S. dollar and more stability from China (which affects other emerging countries) have helped form better growth expectations. Although there is a time lag for low commodity prices and their effect on growth, lower prices are generally stimulative.
- China’s economic transition is going to progress in fits and starts for years. The shocking news that the apparent strength investors perceived in the growth story was perhaps misplaced shouldn’t be a surprise; sadly, the knock-on effects, especially with respect to emerging markets, have been sharp. It’s too early to give up on this story, but many emerging markets – including China – are now on their own rollercoaster ride.
- Central banks, with the exception of the U.S. Fed, have been moving more aggressively to stimulative policies. These include something scarily known as NIRP, or ‘negative interest-rate policy.’ In essence uncharted waters for policy-makers, NIRP should prove stimulative and drive investors to risk assets, especially stocks.
“Life is a rollercoaster; you have your ups and downs, unless you fall off.” Author John Updike
The graph below demonstrates the return and volatility history of the S&P 500 price index and the VIX index during the post-crisis recovery. The market has had three drawdowns in 20 months, two qualifying as corrections (more than a 10 % decline). Normal volatility has returned after a long three-year period of low volatility, mild pullbacks and steadily rising returns.
“Many traders ride an emotional roller coaster and miss the essential element of winning: the management of their emotions.” Professional trader Alexander Elder
It has been, without question, a challenging time for equity and commodity markets since the summer of 2014. As this graph shows, diversified investors have been riding up and down on the rollercoaster with little time to catch their breath. The returns from various hedge-fund and strategist portfolios indicate that trying to ‘time’ trades through this period has been largely futile; portfolio insurance, in the form of liquid alternatives, hasn’t really helped either. One fact to keep in mind is that a roller coaster ride is supposed to be bumpy.
“Stay in your seat come times of trouble. It’s only people who jump off the roller coaster who get hurt.” Broadcaster Paul Harvey
Our thinking is that U.S. recession fears are overstated, and the economy will continue to grow at a steady but low rate. We are still modestly bullish on global stocks, think U.S. rates will stay lower for longer, expect the dollar to stabilize or weaken slightly, and expect global growth to be low but positive. The trickle-down effects of these events will help all regions and most asset classes, with a caveat that we’ll be going through sections of the rollercoaster that may cause your stomach to flip.
We take a long term approach to planning and investing. When we create your financial plan, we consider a variety of circumstances and strategize for a number of possible outcomes. Periodically, some changes to the plan are needed to stay on track. During the recent bout of market volatility, we took advantage of market weakness and rebalanced accounts and made other adjustments as necessary. While these changes may not bear fruit right away, we expect them to benefit us in the future. Finally, we believe in capitalism, the virtue of patience and letting time work its compounding magic. Often good news – especially about the U.S. economy – is ignored to focus on everything that MIGHT go wrong. We’re optimistic about the future, with the caveat that some hairpin turns or ‘zero gravity’ rollercoaster moments may be on the course ahead.
If you’d like to discuss your plan and consider some changes in light of the ride ahead, please call us.
As always, we welcome your comments, questions and feedback.
-Your Wealth Management Team at JJ Burns & Company
Disclosure: J.J. Burns & Company, LLC is a registered investment adviser with the U.S. Securities & Exchange Commission and maintains notice filings with the States of New York, Florida, Pennsylvania, New Jersey, Connecticut, and California. J.J. Burns & Company, LLC only transacts business in states where it is properly registered, or excluded or exempted from registration. Follow-up and individualized responses to persons that involves either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion.
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2016: 1st Quarter Summary