S&P 500 Finishes Positive in Q1 – after a tumultuous start to the year, with the S&P 500 down over -10% through February 11, stocks rallied to finish the quarter positive (up a little less than 1%). With the quarter behind us, think back to how you felt in mid-February in the depths of volatility. Did you think, ‘this is it – the bear market is finally here.’
Perhaps, some investors even traded portfolios into more defensive postures as a result, selling away equity holdings. Hopefully, that wasn’t the case. For all the negative headlines that surrounded the downside volatility, the market stayed true to fundamentals and ultimately demonstrated resilience. Our experience in the first quarter could be a telltale sign of what to expect for the remainder of 2016 – lots of volatility, with the market fighting its way incrementally higher. It could be a difficult journey but just remember that all’s well that ends well, which is what we expect for 2016.
Yellen Turns Dovish Again – in her speech before the Economic Club of New York on Tuesday, Janet Yellen softened her tone considerably when discussing the path forward for the federal funds rate. She stressed concerns that weakening conditions globally and ‘financial uncertainties’ posed risks to the U.S. economy and earnings, and used that line of thinking to justify a more gradual pace of interest rate hikes. What Yellen essentially believes is that, with interest rates hovering close to zero, the Fed has plenty of tools available to ward off future inflation if conditions improve and rising oil influences prices. On the other hand, the Fed may risk inciting a recession if they raise rates too fast, so perhaps it’s just better to favor keeping rates lower for longer. Her remarks were notably dovish: “reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower….foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined.” Markets responded with a slight boost but nothing remarkable, as the “gradual” story is already well established. Yellen did pepper her remarks with some optimism, when she said that the U.S. economy has proven to be “remarkably resilient.”
Weaker Dollar a Tailwind for Multinationals? – the dollar has been on a slide over the last six-plus weeks, and Yellen’s dovish comments may restrict further strengthening in the near term. This week the dollar hit a six-week low against the euro and Asian currencies also saw some strengthening against the greenback. The Australian and New Zealand dollar are near nine-month peaks, a good sign that the dollar is settling up a bit. And, that could be good for U.S. multinationals which have seen considerable impact from the strengthening dollar. A case and point can be found in the technology sector, which is about as global as it gets. Microsoft indicated in their Q4 earnings statements that the strong dollar had reduced its revenue by about $1.9 billion; IBM estimated the negative impact to be around $1.5 billion; Oracle said the dollar cost them about $540 million; and, Alphabet (Google) went further and said that, in Q4, the impact was $1.3 billion (on top of the $1.1 billion hits it took in Q1 and Q2). A weakening dollar could play well for earnings going forward.
China Looking to Reset Growth – the Asian Development Bank forecast GDP growth for China slowing to 6.5% this year and 6.3% in 2017, which is slightly weaker than the 6.5% – 7% communicated by state officials. In either case, it implies very solid contributions from the world’s second largest economy to global GDP. All the talk of a hard landing seems wildly overblown, in our view. The People’s Bank of China also gave the markets some cause for optimism when they announced this week that they plan to expand the consumer credit market and will encourage financial firms to issue bonds and open up more credit mechanisms.
Disclosure