March 2016
EXECUTIVE SUMMARY
•
•
CPA, CFP®, CIMA®
Partner,
Chief Investment Officer
U.S. stocks ended the month with mixed performance, with mid caps gaining
1.1% while large caps and small caps were essentially flat.
•
Bonds rallied in February, as the flight to quality suppressed long-term rates;
the yield on the benchmark 10-year Treasury ended the month at 1.74%, down
from 2.2% at the start of the year.
•
Contrary to expectations, estimated 4th quarter GDP growth was revised
upward, from 0.7% to 1.0%, mostly on higher inventory accumulation and a
slightly narrower trade deficit.
•
JIM BAIRD
The recent surge in market volatility that began mid-December persisted into
February, as did market anxiety about the slowing global economy. Those
concerns subsided in the latter half of the month, relieving some of the
downward pressure on risk assets.
The divergence between the expectations of FOMC members and the markets
regarding the pace of future rate hikes came back into focus, creating a
potential source of future volatility as the actual policy path becomes clear.
MARKET VS. FED EXPECTATIONS FOR THE FED FUNDS RATE
4.0
Fed Funds Rate (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Fed Range
Fed Funds Effective Rate (%)
Fed Median Expectations (December 2015 Meeting)
Market Expectations (Feb.
29, 2016)
Source: PMFA, Federal Reserve
MONTHLY INSIGHTS
Since the the Fed Funds target rate was
raised in December, volatility in stock
prices and concerns about the pace of U.S.
economic growth have widened the gap in
expectations between the markets and the
FOMC itself.
Today, the futures market is pricing in only
limited interest rate increases this year,
while the official Fed stance is for four rate
hikes in 2016 as part of their “gradual”
transition away from the historically low rate
environment. The chart on the left
highlights this divergence in expectations
as of the end of February. That gap is likely
to be a source of uncertainty for investors
until it becomes clearer whether the Fed
will moderate its views or forge ahead.
.
2
A Two-Way Street
The most recent bout of market
volatility that began mid-December
persisted well into February, and
equity markets extended their
decline early in the month. In spite
of that soft start, February also
served as a demonstration that
volatility is a two-way street, with a
number of sizeable single-day gains
for stocks that ultimately brought the
broad U.S. equity market back in
line with where it started the month.
Performance Overview - As of 02/29/2016
Fixed Income
MTD
YTD
0.1%
0.7%
Barclays 1-3 Yr Govt
0.4%
1.0%
Barclays 3 Yr Muni
0.7%
Barclays Aggregate
0.2%
Barclays 1-10 Yr Muni Blend
2.1%
1.3%
1.1%
Barclays US TIPS
2.6%
0.6%
Barclays High Yield
-1.0%
0.8%
0.7%
Barclays Global Credit
-5.0%
0.0%
5.0%
Equity
MTD
S&P 500
MSCI EAFE
1.1%
-5.5%
0.0%
-8.8%
-1.8%
-8.9%
MSCI EM
Alternatives
0.0%
-5.7%
Russell MidCap
Russell 2000
-0.1%
-5.1%
Russell 3000
YTD
-0.2%
-6.6%
-10.0%
-5.0%
0.0%
MTD
Alternatives
5.0%
YTD
-0.3%
HFRX Global Hedge Fund
-2.3%
-1.6%
Bloomberg Commodity
-3.3%
-5.0%
Source: PMFA
Indications of a slowdown in global
growth generated concerns early in
February, as some feared the
sluggishness abroad would impede
further expansion of the U.S.
economy. The waters calmed
somewhat by the end of the month
as investors looked to indications
that further stimulus may be
forthcoming in China, Europe and
elsewhere, and that economic data
in the U.S.
was largely exceeding
expectations.
In China, leaders announced a
target growth range of 6.5%-7%
when they met in early March, in an
attempt to steer the country through
a transition from a manufacturing
based economy to a consumerdriven one. China traditionally sets a
specific growth target, but setting a
target range is an attempt to reflect
the inherent uncertainty in the
process, while still maintaining a
healthy expansionary pace.
The economies in the Eurozone
grew 0.3% in the last quarter of
2015, and its consumer prices rose
an annual 0.4%, after a 0.2% gain
last month. Some countries, like
Sweden, are extending negative
interest rates to boost liquidity, and
analysts expect the European
Central Bank (ECB) to provide
further stimulus as early as March.
These initiatives to fuel growth are
often positive for stocks in the shortterm, though the potential for a
negative response exists if actual
policy announcements fall short of
expectations.
Meanwhile, in the U.S., a key
question is whether the Fed will hold
to its stated intention to gradually
ratchet up interest rates this year.
As noted in our Monthly Insights
section, there is a widening
divergence developing again
between the FOMC’s stated
.
3
ENERGY EARNINGS HAVE WEIGHED ON S&P 500
EARNINGS
300
expectations and those of the
markets – a source of uncertainty
that has the potential to be a
catalyst for further volatility (positive
or negative) in the months ahead.
Today, those indicators suggest that
the U.S. economy is continuing
along a path of modest growth.
Contrary to expectations, the
estimate for 4th quarter GDP was
revised upward, from 0.7% to 1.0%,
mostly on higher inventory
accumulation and a slightly
narrower trade deficit. Consumer
spending and housing showed
healthy growth, though business
investment declined during the
quarter, driven largely by aggressive
cutbacks in capital expenditures by
companies in the energy and
manufacturing sectors. For the year,
the economy appears to have grown
by about 2.4%, very much in line
with its 2014 pace.
The labor market continues to
strengthen by any number of
measures, including new jobs
created, an increasing participation
rate, low unemployment and layoffs,
and stronger voluntary turnover.
Wage growth continues to show
signs of picking up – a positive for
workers, but a potential challenge
for employers and consumers.
In
the absence of corresponding
productivity gains, wage pressures
could feed into higher inflation (as
higher labor costs are passed along
to consumers in the products and
services they are purchasing) or eat
into corporate profits. Core inflation
has been inching higher over the
past year, even as headline
Indexed to 100
Speaking before Congress last
month, Fed Chair Janet Yellen said
that risks from slower global growth
could delay the central bank’s plans
for raising rates, but ultimately the
Fed will have to weigh this against
what it observes in several key
economic indicators: growth,
employment conditions, actual
inflation, and inflation expectations.
250
200
150
100
50
0
-50
S&P 500 Trailing One Year Energy Earnings
S&P 500 Trailing One Year Earnings
Source: PMFA, Standard and Poor’s
numbers have been tempered by
declining oil prices.
Investors are also keeping an eye
on corporate earnings, which
declined again in the 4th quarter.
With all but a handful of companies
in the S&P 500 reporting, index
earnings are down about 11% yearover-year. In addition, it marked the
first time there have been three
consecutive quarters of year-overyear declines since 2009.
Some of
this slump is attributable to a strong
dollar and a weakness in overseas
demand; companies that have 50%
of revenue coming from abroad
have reported lower sales growth
and lower earnings growth.
Another major factor has been the
sharp decline in energy sector
profits, as demonstrated by the
chart above that compares the
earnings performance of the energy
sector to that of the S&P 500
companies as a whole. Analysts
expect earnings to be flat or even
decline modestly in the first half of
2016, but to turn more sharply
positive in the third quarter of 2016.
As the U.S. economy enters its
seventh year of expansion amid a
slowdown in global growth and a
challenging period for U.S.
corporate earnings, the risk of
recession remains somewhat
elevated.
Those risks may have
declined in the past month, although
it’s impossible to pinpoint turning
points in the economic cycle in real
time. Growth remains muted, but
there are some indications that the
risk of a near-term recession are
subsiding. In fact, much of the
available data today indicates that
the economy is not only growing,
but also regathering some of the
momentum lost late in 2015.
Turning to market performance in
February, equities had mixed results
for the month.
In the U.S., mid caps
led the pack, with the Russell
MidCap index posting a gain of
1.1%. Both large caps and small
caps ended the month essentially
flat, despite what was a volatile
path. The S&P 500 recorded a
small loss of 0.1% and the Russell
2000 had no net movement during
the month.
While it’s still early, domestic equity
indexes remain down year-to-date.
At the end of February, small caps
remained down by nearly 9% since
the beginning of the year.
Large
caps had slipped by about 5%, as
shrinking risk appetites have
swayed investors towards larger,
more established companies.
International equities were not
immune to the continuing volatility,
losing ground during the month.
Emerging markets continued to face
headwinds from the stronger dollar
and capital flight, while returns in
. 4
developed market stocks were
boosted by some depreciation of the
dollar relative to the Euro and Yen,
but still underperformed U.S.
markets for the month. The MCSI
EAFE lost 1.8% in February and
remains down by nearly 9.0% for
the year, while the MSCI Emerging
Markets Index gave up 0.2% last
month, leaving it with a 6.6% loss
year-to-date.
Though global equities were flat or
modestly negative in February,
bonds rallied as the flight to quality
pushed interest rates lower. The
yield on the benchmark 10-year
Treasury ended the month at
1.74%, down from 2.4% at the start
of the year. The Barclays Aggregate
added 0.7% last month, pushing its
year-to-date gain to over 2.0%.
The
Barclays 1-10 Year Muni Index
gained 0.2%, lifting its year-to-date
return to 1.3%. Domestic high yield
and global credit indexes also
advanced during the month, paring
earlier declines. With the exception
of the Barclays High Yield index, all
are sitting on at least modest gains
year-to-date.
Overall, the first two months of 2016
serve as a good reminder of the
critical role that bonds play in
balancing a diversified portfolio,
helping to minimize the volatility that
can be associated with equities
while providing a source of income.
Periods of high volatility are
inherently uncomfortable for
investors, particularly as markets
move lower.
However, volatility can
generate big moves in both
directions in the equity markets—
BLOG Past performance does not guarantee future
For other up-to-date
economic briefs, visit
PMFA’s Market
Perspectives Blog at
market-perspectivesblog.pmfa.com.
PODCAST
“Perspectives,” our monthly
podcast, offers an abridged
version of our monthly
Market Perspectives. To
listen, please visit iTunes or
wealth.plantemoran.com.
results. All investments include risk and have
the potential for loss as well as gain.
Data sources for peer group comparisons,
returns, and standard statistical data are
provided by the sources referenced and are
based on data obtained from recognized
statistical services or other sources believed
to be reliable.
However, some or all of the
information has not been verified prior to the
analysis, and we do not make any
representations as to its accuracy or
completeness. Any analysis nonfactual in
nature constitutes only current opinions,
which are subject to change. Benchmarks or
indices are included for information purposes
only to reflect the current market environment;
no index is a directly tradable investment.
There may be instances when consultant
opinions regarding any fundamental or
quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA)
publishes this update to convey general
information about market conditions and not
for the purpose of providing investment
advice.
Investment in any of the companies or
sectors mentioned herein may not be
appropriate for you. You should consult a
representative from PMFA for investment
advice regarding your own situation.
such as those we witnessed in
February.
During such periods, it’s appropriate
to reaffirm your return objectives,
investment time horizon, and
tolerance for risk. Most investors
must assume risk to reach their
goals, but finding the right level of
risk that will enable them to remain
committed to their strategy is critical.
Failure to take sufficient risk may
put an otherwise achievable goal
out of reach; assuming too much
risk may result in a poorly timed
decision to reduce portfolio risk
when a correction occurs.
Most
importantly, having a plan for
dealing with market volatility – and
then sticking with that plan when
that volatility occurs – puts the
investor in the best position to
achieve their goals.
GRATUITOUSLY
UNNECESSARY NEWS OF
THE MONTH
One Half-Good Samaritan
New York native Reilly Flaherty lost
his wallet at a concert in Brooklyn
last month and assumed his cash,
IDs and credit cards were gone
forever. He was surprised, therefore,
to find an envelope in the mail
containing some of what he had lost
along with a note two weeks later.
Flaherty got back his credit cards
and driver’s license, but not the cash,
his metro card or the actual wallet.
The accompanying note read: "I
found your wallet, and your drivers
license had your address so here's
your credit cards and other important
stuff. I kept the cash because I
needed weed, the MetroCard
because, well, the fare's $2.75 now,
and the wallet 'cause it's kinda cool.
Enjoy the rest of your day.
Toodles,
Anonymous."
Flaherty’s response to this half-Good
Samaritan, half-thief was: "thanks... I
think?"
.