Market activity has been consistent with the outlook we’ve expressed over the past year: we will likely not see an impending bear market in stocks caused by an economy entering recession.
The First Quarter Rally
After a few bumpy opening weeks, the first quarter saw global equity markets rally sharply from mid-quarter lows. The rebound began on February 12th, riding a growing belief that oil prices have begun a sustainable recovery, better than expected economic data, and supportive monetary policies.
Investors had feared that conflicting policy objectives would lead to a dramatic devaluation of the Chinese yuan, which, in turn, might have caused global economic turmoil. Instead, central bankers around the globe appear to be coordinating
policies to avoid counterproductive measures. Recent signs of cooperation and comments from Fed Chairwoman Yellen have eased concerns and injected a measure of confidence in the U.S. and Chinese economic outlooks.
The Earnings Headwind
Although the S&P 500 managed to post a modest gain in the volatile first quarter, further gains will most likely require a return to positive earnings growth. Dollar strength and the weakness in oil prices have been a major headwind for corporate earnings.
As we proceed through 2016, we anticipate both dollar strength and oil uncertainties to gradually diminish. With global growth weak and inflation nonexistent, low interest rates in the U.S. should be a tailwind for the financial markets.
Broadly Constructive, But Volatile
Despite recent market turbulence, we remain broadly constructive on the global economic outlook for 2016. However, it wouldn’t be surprising if financial market volatility remained high due to investor concerns over future Federal Reserve interest rate increases, Chinese growth trajectory, fallout over low energy prices, and lastly, the unsettled political landscape.
Although unpredictable geopolitical events and the volatility they generate may temporarily unnerve investors, trying to time markets can be just as unsettling. Timing markets is a guessing game, where an investor needs to make two sound decisions instead of simply one. We advise clients against losing patience and selling at what may be the bottom of a downturn, and instead choosing to stay with the long-term plan created during less fearful times.
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