Economic Overview: First Quarter 2016
“It was the worst of times, it was the best of times…” – Charles Dickens’ A Tale of Two Cities
The global economy is not in as bad a shape today as described in that famous line depicting the depressing conditions in London and Paris during the French Revolution, but you might not know it based on the behavior of the financial markets at the beginning of this year. After just the first ten trading days of 2016, the U.S. market (S&P 500) had retreated over 8%, marking the worst start to the New Year in history. On top of losses in late 2015, the decline put the U.S. market in correction territory (defined as a decline of 10% or more from its recent high). Many international markets were down more.
As we described in a note to clients at the time, most of the weakness seemed broadly attributable to the following major headlines:
- Fed Policy – Spreading lack of confidence in the ability of global central banks to stimulate economic growth, and increased concerns that current monetary policies are now doing more harm than good (for example, we worry about low interest rates in the U.S. causing bubbles in various sectors such as real estate; and central banks in Japan and much of Europe are now maintaining negative rates, a practice that is relatively untested and could have unknown consequences)
- China – Growing fears of a hard landing in the Chinese economy, possibly accompanied by a sharp and sudden devaluation of the Chinese currency (that would have the effect of making Chinese goods cheaper in the U.S., and our exports to them more expensive)
- Commodities Bust – Continuing plunge in oil prices to under $30 per barrel, from $40 at the start of the year (while lower prices are a net advantage for consumers and most businesses, the extreme declines in energy prices are greatly reducing profits in that industry, and impacting other companies that serve them)
- Recession – Some weaker-than-expected U.S. economic data and growing fears of a recession
However, like Dickens’ famous novel, it was also a tale of two halves for global financial markets in the quarter ended March 31. After significant losses through mid-February, as the table below depicts, markets across the globe began a violent rally that more than made up for the declines earlier in the year. As a result, most asset classes finished the first quarter with positive returns. In the face of increased volatility in the stock market, bonds offered a relative safe haven.
All references in this publication referring to our average allocation or “typical portfolios” reflect those of the fully discretionary accounts of clients with moderate risk profiles. Actual client portfolios are tailored to individual client circumstances and asset allocations may vary. Any reference to returns reflect the performance of asset classes, are for illustration purposes only, and do not reflect the returns of any specific investment of Smith & Howard Wealth Management. No representation is made that any investment decisions discussed herein have been profitable in the past or will be in the future. Past performance is no guarantee of future results. A list of all recommended investments is available upon request.