Quarterly Commentary – March 2016

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The adjective volatile would be an understatement to describe what transpired during the first quarter of 2016. U.S. equities fell sharply in January and through the first ten days of February with declines on major U.S. indices exceeding 10%. Losses on the Russell 2000 Index representing small companies for example exceeded 16%. The rest of the quarter however saw a powerful retracement that erased a significant portion of the losses. The following are performance numbers from various popular indexes for the quarter. Index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 reflected a gain of 1.35% for the first three months of 2016. The Dow Jones Industrial Average was up 2.20%. Small company stocks represented by the Russell 2000 Index ended down 1.52% for the year. International equities as represented by the MSCI World Ex U.S. Index were down 1.95%. Fixed Income as represented by the Barclays Aggregate Bond Index closed up 3.03% for the year.

The equity market declines were brought on by a combination of factors to include concerns over the China slowdown and its impact on the growth of the global economy, increased concerns about a possible recession here in the U.S., uncertainty and fears about the Feds path to raising rates and the impact on the U.S. Dollar. A severe supply glut brought oil prices down to a low not seen in over a decade and representing a drop of 75% since the recent high in 2014. Oil prices have come back up by about 50% since the low of February. U.S. equities became highly correlated with the movement of oil prices. The severe drop in oil prices had an impact on energy related earnings and a deteriorating credit picture for companies in that industry for those that survived, along with a major weakness in the commodity markets which had the potential for wider ramifications throughout the broader economy.

The U.S. manufacturing sector has been in a recession since late 2014 and although the sector remained in contraction territory, the situation appears to be stabilizing as the dollars appreciation has stalled. The headwinds from China, market turbulence and soft economic reports cast doubt about the strength of the U.S. economy earlier in the quarter but the more recent data indicates that things were not as soft as originally perceived. In light of where things appeared to be headed, the Fed lowered its expected path of rate increases and indicated that it would err on the side of caution. Consumer spending has been a source of strength. The service sector has been doing well and continues to represent an expanding portion of not only our economy, but the global economy. Central banks around the world have promised more easing measures and Chinese policymakers are focused on increasing clarity. During that time, the rising price of oil and falling value of the U.S. dollar have removed some risk from the global financial markets. The odds of a recession have abated materially since earlier in the quarter.

This is not to say we are out of the woods. On the list of concerns that could derail the economy we still have the issues with China and its policies as it manages for lower growth, credit concerns, interest rate tightening, a potential exit of the U.K. from the EU, geopolitical risks and election year uncertainties. The pace and outlook of earnings growth for U.S. companies has slowed. This will require sustained economic growth to resume an upward trend. On a positive note, improving labor market and domestic spending which is a very important part of our economy indicates that the U.S. economy has been and continues to be resilient. With a recession being unlikely at this juncture, an U.S. equity market that has been in correction mode since August of 2015 and no exuberance being present, continuing upward appears probable. Markets always overshoot both on the downside and the upside. This past quarter exemplifies why staying the course is important to long term success.

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