Overall, market fundamentals are in good but not great shape. Worldwide economies are slowing and uncertainty continues to dominate headlines, but it’s not a reason to head for the hills. In addition, with a backdrop of continued low interest rates (either next to nothing or negative), equities continue to be the only game in town. So while there is a lot to be worried about, the thing that is most in favor of rising stock prices is the fact that in public markets worldwide, There Is No Alternative (TINA) to invest in.
“V” is for the volatility that the market experienced in the first quarter. It’s also the shape which the S&P formed over that same time period. The first half of the quarter consisted of wild daily swings and a sharp decline (down 11%), while wild daily swings and a subsequent sharp increase (up 13%) made up the second half. Despite all of the crazy movements, the S&P 500 ended right about where it started, +1.30%.
It was a crazy first quarter and an extremely tough one for investment managers. Nearly 80% of Large Cap mutual funds underperformed the S&P 500, and unfortunately, it doesn’t seem like the backdrop for the second quarter will get any easier. Despite the volatility, and the sharp reversal to the upside, the same fears and issues remain: oil price volatility, global slowdown fears, Fed uncertainty, China destabilization, and presidential election uncertainty. Because things have yet to paint a clearer picture, our strategy largely remains unchanged.
As we enter 2016, we remain mindful that we are in the 7th year of a strong bull market, and as the length of its run grows longer, emotions rather than sound advice and fundamentals tend to drive prices. Volatile price swings in both directions become commonplace and markets move counter to common sense. While difficult during times like this, it’s important to stay disciplined in your strategy and continue to focus on longer term investment objectives.
While the trajectory of returns since the March 2009 bottom is unsustainable, we believe that markets can and will continue upward. This doesn’t mean that there won’t be volatility, but people tend to forget that before we hit highs in 2013, the market, on a price basis, had been flat for 13 years. It’s only been 2 1/2 years since that record high, and if history repeats itself, which it tends to do in the investment world, the bull still has room to run.
