Q1 2016 The Volatility Rollercoaster
The year began with a perilous plunge, with equities experiencing losses in January through mid-February. Investors were quick to gather themselves taking equities back to even at the end of March closing out one of the more volatile quarters since the 2008-2009 financial crises. The Dow finished the quarter with a +1.49% return and the S&P 500 also narrowly escaped a negative quarter with a return of +1.35% including dividends. The NASDAQ 100, Russell 2000 and most foreign markets didn't fully recover from Q1 plunge in January and February. Treasury yields also declined as flight to safety increased. This was evident in the currency markets looking at the rally in the Japanese yen vs. its foreign counterparts. On the fixed income front, the 10-year yield closed at 1.79% dropping from 2.25% at the end of 2015. This level proved to be the lowest close for a quarter since 2012. Gold finished with a 16% gain on the back of investor angst and reduced fears of any further interest rate increases for now. Oil volatility continued which had a trading range of about $10 hitting $26/barrel at one point intra-day. The recovery in oil served as one of the main catalysts for the equity rebound. The strong move made investors rethink the recession chatter that took place early in the quarter. March saw 215,000 new jobs added to the US economy which has been in line with previous reports over the last year. Employment continues to be a bright spot for the US economy unwavering from its 200,000 average monthly job creation that has been in place for several quarters. The Fed concern over volatility in the quarter manifested itself in their reluctance to further increase the fed funds rate from its 25-50 bps range. An uncertain macro economy, low inflation and slow exports were cited as reasons for holding steady. Present inflation levels are below 2%, however, the US economy experienced a year-on-year inflation increase of 1% this quarter which is enough to keep the Fed at the forefront of investors concerns. On average, housing is fairly steady nationwide but is starting to show signs of cooling. Existing home sales were down 7.1% in February. In some markets, the high-end residential space is experiencing slower sales with year-over-year sales prices coming off post-recovery highs.
International markets performed worse than their US counterparts. The MSCI EAFE index dropped -3.01% for the quarter. The European Central Bank expanded their stimulus efforts in March bringing their deposit rate further into negative territory and lengthening the program until March 2017. The downgrade to the Eurozone inflation outlook was remarkable. Predictions of just a 0.10% rise in inflation are in store for 2016. This follows 2015 which resulted in zero inflation. Valuations remain appealing for long-term investors at a little over 14.0x forward earnings. The Japanese market, measured by the Nikkei 225 index, was down -11.95% for the quarter. The BOJ continue their relentless pursuit of unprecedented stimulus to inflate their economy. With yields out to 10 years now negative, investors are taking ever greater risks to garner any yield at all.
2016 ASSET ALLOCATION UPDATE
At the turn of the year, TIC took a conservative stance that has turned out to be very beneficial thus far for our clients. Fixed income has largely been the recipient of investor flows as the flight to safety was evident during the quarter. Treasuries were the early beneficiary but as equity markets turned around, credit sensitive fixed income followed suit bringing the CGT fixed income composite up +2.00% on average. As we write, fixed income continues to outpace equity markets as equities face daily headwinds of earnings, Fed speak and international developments. The CGT Balanced allocation target still remains at 50% equity, 45% fixed income and 5% cash which is essentially unchanged since late 2015. Cash remained slightly higher than normal in the quarter which helped during the brunt of the sell-off in January. Within equities, our value/dividend preferences have helped with absolute and relative performance. Our slight downgrade towards international equities in late 2015 to 30% of the equity model proved timely as struggles overseas continue. We remain constructive long-term overseas as valuations pose greater opportunity vs. US markets and monetary policy remains accommodative.
In hindsight our asset allocation adjustments of less equity and more fixed income have served our clients well so far in 2016. Fixed income remains a safe haven from the volatility as the conflicting news flow continues. Our manager selection process prioritizes downside protection over upside capture which was put to the test this quarter. Several of our managers performed significantly better than their benchmarks on a relative basis. Listed below are composite results from some of our managers vs. their benchmarks.
|Manager||* Q1 Return||Benchmark|
|Federated Strategic Value Dividend||+7.98%||+1.35 S&P 500|
|Alta Capital Management LC Growth||+1.28%||+0.74% Russell 1000 Growth|
|Congress Asset Management MC Growth||+3.66%||+0.58% Russell MC Growth|
|Granite Investment Partners SC Growth||+0.17%||-4.68% Russell 2000 Growth|
|Federated International Strategic Value||+3.96%||-2.88% MSCI EAFE|
*Returns are expressed as composite returns. Results may vary. Past performance is no guarantee of future returns