When it comes to investing, patience is a virtue. If you don’t believe that, take a look at the major swings in the stock market from January through the end of March, then read some of our posts from earlier this year and it will all make sense. Stocks plunged in January, it was the worst start to a year ever recorded and markets fell even further in early February. At that time a bear market seemed like a real possibility. But then, like a bipolar big brother, markets turned around and picked us back up, ending the quarter slightly positive. The first quarter of 2016 was a quarter marked by rebounds; in stock indexes, in some key economic indicators, in oil prices, and more.
Domestically our economy is chugging along, albeit there’s definitely room for improvement. Arguably the most reassuring development for financial markets happened in March. The Federal Reserve not only refrained from raising interest rates, they also scaled back forecasts for rate hikes through the remainder of the year. In addition, the Labor Department’s employment reports showed net job gains each month in the first quarter. Unfortunately, as labor force participation rose the unemployment rate also ticked up a bit.
Household optimism wavered in early 2016, possibly as a result of increased volatility in global markets. This was evidenced by both the Conference Board’s “consumer confidence poll” and the University of Michigan’s “household sentiment index”, which recorded final March readings slightly lower than the previous year. Taking this into consideration, it shouldn’t be a surprise that consumer spending remained flat and retail purchases were slightly lower.
Global economic health is questionable. While the Fed was tightening, other central banks across the globe were easing. After years of battling deflation pressures, the Bank of Japan made a surprising move in January by cutting benchmark interest rate below zero! If you’ve heard people mention “negative rates”, this is most likely what they were referring too. Over in Europe, the European Central Bank ramped up stimulus efforts by slashing its key interest rates and expanding its bond buying program. Closer to home, both Mexico and Canada started showing signs of growth, a strong signal overall for North America. But what about China? If you thought the drops in U.S. markets were big last quarter, the movement in China’s indexes dwarfed ours. When you compare the charts, China’s extreme roller coaster swings made the U.S. look like a kiddie carnival ride. Fortunately, they too bounced back to finish the quarter down slightly.
Commodities and real estate fared well. The first quarter of 2016 was good for platinum, silver, gold and oil. In fact, gold hasn’t had a quarter like this in almost 20 years, and oil finally had its first positive quarter in a year! New home purchases seem to be trending downward though. This is most likely due to the difficulties facing first time home buyers in terms of affordability and financing. If you can qualify for a mortgage or refinance, the good news is that rates are still hovering around historic lows. Still, home prices are on the rise along with rents, especially in major metropolitan areas and tech hubs.
Looking back and forward. After more than 70 months of a strong bull market we’re seeing signs once again of possible slowing across global economies. We know that financial markets have cycles, and corrections are unavoidable. Will the second quarter be calmer or better than the first? Nobody knows… While investors’ appetite for risk appears to have returned, nothing suggests that first quarter earnings season will be a good one. Employment and manufacturing indicators are somewhat encouraging, but major downside risks are lurking. Whether it be terrorist attacks, weak corporate profits or the possibility of the United Kingdom exiting the European Union, investors should expect continued volatility.