Global stock markets experienced one of the worst starts to a year ever. Worries about slowing global economic growth precipitated by continued weakness in commodities was the main culprit. All equities were affected as traders predicted a recession in the U.S. The S&P 500 declined more than 10%, while gold and treasuries rallied. The 10-year treasury yield fell to 1.64%, its lowest level since May 2013.
The U.S. Federal Reserve (Fed) has transitioned to its first rising interest rate cycle since 2006, yet there is uncertainty. The Fed held rates steady in January, following its modest 0.25% hike in December. This pause highlights the challenges the central bank faces as it searches for the correct pace and ultimate ending level for rate hikes. Future hikes will be data dependent, and the numbers haven’t been all bad, especially employment reports. Given the decent economic reports, it does not appear that the U.S. is headed for a recession even though financial markets have been challenged.
Markets bottomed in the middle of February, then reversed course as a result of the positive development noted above as well as continued stimulus from the European Union. Domestic stocks as measured by the S&P 500 rallied 13% since February 11, and are now slightly positive for the year. Similarly, international stocks as measured by the MSCI EAFE index dropped 13% to start the year, but subsequently rallied 16.2%. Year to date, the MSCI EAFE is down 3.5%. Emerging market stocks, one of the worst performers over the last few years, is the best performing equity asset class year to date, up more than 5%.
Stock market volatility is likely to continue as the Fed continues to debate future rate hikes and European, Japanese, and Chinese economies respond to stimulus put in place by their central bankers. Lower energy prices have not produced positive effects as rapidly as many had hoped, but do provide a tailwind to increased consumption in many markets across the globe. Risks exist, and volatility is likely to remain at or above normal levels. However, we expect economic growth to continue in 2016 and for markets to grind higher with the bull market remaining intact.
Corrections are a normal part of bull markets, and we’re in the midst of one of the longest bull markets in U.S. history. While recent volatility has been unsettling, it is not out of the ordinary. Central banks across the globe are still focused on stimulating the markets. Valuations in many markets are still attractive, which may provide opportunity amid the uncertainty. We still firmly believe a well-diversified portfolio that is accurately reflective of your risk tolerance is the right strategy for 2016 and beyond. With this in mind, we will reiterate our advice from January (which is applicable any time, not just when markets exhibit heightened volatility). Investors should focus on and reaffirm their goals, time horizon, and risk tolerance. As always, if it has been a while since you’ve visited with us about your financial goals, please feel free to contact your account administrator. They will find a mutually convenient time to review your account and determine if the current allocation is still appropriate for your circumstances.
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