First Quarter 2016 Market Review

To say that the past three months have been a volatile period for the market is not an exaggeration. With terrorism in the background, oil prices plummeting, negative interest rates in Europe and Japan, and economic growth in question throughout most parts of the world, January got off on a terrible note, sending the Dow to its worst 10-day start to the year on record going back to 1897! Although the market began to turn back up during the latter part of January, it started to decline sharply again in early February, eventually bringing the market down to a year to date total return of -11.4% by mid-February. Fortunately, the fears of an economic meltdown gradually dissipated from that point on and the market actually ended the quarter up a modest 1.35%.

Nonetheless, the first quarter was one of those nervous market periods where so-called defensive stocks (as opposed to growth stocks) took their place on the leader board given the perceived stable nature of their operations. The Consumer Staples stock group (Proctor & Gamble, Coke, Clorox, etc.) is a perfect example of defensive type stocks. This sector accounted for 47% of the gains reported for the S&P. On the other end of the spectrum, Consumer Cyclical stocks ranked near the bottom during the period in terms of returns.

In the end, what matters most to investors is that economic growth remains healthy enough to increase consumer paychecks and grow corporate profits within a reasonable inflationary environment. The stock market began to move higher again in mid-February in response to what turned out to be an improvement in U.S. economic conditions. In addition, inflation is beginning to move higher and, excluding food and energy, is close to the Federal Reserve’s 2% objective for perhaps the first time since the stock market began to move higher in 2009. The velocity of money is also beginning to improve (+8%) which means the economy is finally making use of the extra money the Fed has been printing over the past several years. Barring a rash of terror attacks, talk of interest rate hikes, or another hit on oil prices, the investment environment should be OK for at least the short term.