March 2016 came to an end with markets close to unchanged for the quarter. However, this does not tell the full story. The year started off with one of the worst starts for any year. By February 11, most markets were down 10% or more for the year. Many markets were actually down over 20% from their 2015 peaks. A decline in oil prices helped to lead the markets lower. Then, helped by some discussion by oil producers to limit production, oil prices started to rise, as did world markets.
The S&P 500 index was up 0.8% to 2060. The Dow Jones Industrial Average was up 1.5% for the quarter, closing at 17,685. In a big change from last year, Technology stocks fared worse than other sectors, with the NASDAQ Composite Index down 2.7% to 4,870. The best performers for the quarter were actually defensive stocks like utilities and consumer staples. International stocks were down marginally in the first quarter with the MSCI ACWI ex-US (all country world index excluding US) down 0.4%. Emerging markets rebounded from a terrible 2015, up almost 6% in the quarter. Emerging markets were helped by a decrease in the value of the US dollar in the quarter.
Turmoil in global markets early in the year led the Federal Reserve to leave interest rates unchanged. At the beginning of the year, the Fed had indicated that it would increase rates 4 times in 2016. Now, with a quarter of the year done, forecasts are for a maximum of two minor rate hikes for the year. Even this may be doubtful. Interest rates actually declined in the first quarter. The yield on the benchmark 10-year U.S. Treasury fell from 2.27% to 1.79%. Many parts of the world, notably Japan and Europe, are actually experimenting with negative interest rates to increase lending by banks. Imagine putting your money in a bank with a promise you will get back less than you invested!
The US economy continued to grow in the 1st quarter, albeit at a very slow rate, with GDP projected to increase about 1%. The unemployment rate remains low at 5%. Inflation for 2016 still appears to be under control with forecasts of approximately 2% inflation for the year. A rebound in oil prices from lows earlier in the year may actually help push prices up a bit. Also, the relatively tight job market may also start to push wages up. The Fed has purposely kept interest rates near zero to push inflation up. Looking back 30 years, it would have been hard to imagine the Fed trying to increase inflation.
Low oil prices continue to put pressure on stock prices of many energy companies. In addition, the high yield (junk) bond market has seen prices fall and yields rise as fears of defaults in the energy sector have risen. Gold was a stand-out performer in the first quarter with prices up over 16% in 2016. It was the best performance for gold in many years.
2016’s first quarter was definitely a roller coaster ride. Volatility increased dramatically before falling back. Events that may impact the remainder of 2016 include:
- The US Presidential election
- Further Federal Reserve rate hikes
- The slowing world economy, especially China
- Continued pressure on oil prices as Iranian oil returns to the market
- Price deflation and slower growth reducing corporate profits
- Stimulative monetary policies and negative interest rates in Japan and Europe
- Continued chaos in the Middle East and terrorism throughout the world
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