Quarterly Market Update - Q1 2016 By: Gabriel PotterMBA, AIFA® 2016.04.12

Key news stories 
This market made a nearly symmetrical “V” shape during the quarter.  In the first 6 weeks, equity prices were down about 11%, bottoming out on February 11th, on fears of a Chinese slowdown, and weak energy revenues.  However, the fundamental indicators on growth, manufacturing, employment, wages, and housing reinforced the consensus analyst view that the US economy, while not striding forward strongly, was sluggish but positive.  In the next 6 weeks, the broader equity markets – measured by the Russell 3000 index which includes large and small stocks - recovered to almost precisely where it started the year.  

Equities
The currency tailwind which works on bonds (which we’ll go through in the next section) gave both emerging markets and international developed stocks a 3% relative return boost vs. currency-hedged indices.  This 3% boost wasn’t enough to overcome sharp underperformance in core EU countries like Germany, whose stock market was down -7% in Euros this quarter.

All index performance values are for previous quarter.

  • US Large Cap Growth - Russell 1000 Growth: 0.74% 
  • US Large Cap Value - Russell 1000 Value: 1.64%
  • US Small Cap Growth - Russell 2000 Growth: -4.68%
  • US Small Cap Value - Russell 2000 Value: 1.70%
  • Developed International Markets – MSCI EAFE:  -3.01%
  • Emerging Markets - MSCI EM: 5.71%

Bonds
For the quarter, the indicators of relative strength between various types of fixed income were essentially immaterial.  It didn’t matter if your investment manager had corporate credit, mortgage backed securities, or treasuries.  The primary element moving bond values was the Federal Reserve.  Specifically, the expectation that the Fed would be dovish for longer and less prone to boost rates quickly gave a lot of relief to longer maturity bond holders.  Furthermore, the reoriented expectation of a looser Fed softened the US dollar relative to other currencies, so global bonds had a significant tailwind.  The high yield market had divergent performance based upon sector since some high yeild bonds were supported by hydro-fracking operations, which had become unprofitable while oil prices remained below $40 per barrel.

All index performance values are for previous quarter.

  • Barclays US Aggregate Bond:  3.03%
  • Barclays Capital US Intermediate Credit: 2.70%
  • Barclays Capital US Government: 3.12%
  • Barclays Capital US Gov’t/Credit Long Duration: 7.30%
  • Bank of America/Merrill Lynch High Yield Master II: 3.25%
  • Citi World Government Bond Index (non USD): 9.10%

Alternatives
The noise around oil prices continued this quarter.  Attempts of OPEC to join forces to constrain supply weren’t making much of an impact on Iran, which just rejoined the world market and was therefore uninterested in an output level freeze.
As value stocks outperformed growth stocks in equities, the dividend payers (like REITs) did very well this quarter.  Rich, exotic alternative dividend payers like MLPs, preferred bonds, and convertible bonds were attractive given their high yields in this low yield environment. We expect the Credit Suisse Hedge Fund index to catch up somewhat in the next month.  Reporting performance for this asset class is often delayed by a few weeks as this idiosyncratic investment class collates data from a wide swath of managers using complicated strategies.  Since March was such a strong rallying for most markets, even lesser-correlated assets like hedge funds are going to get a boost, particularly from directional products like Long/Short and Global Macro funds.

  • Real Estate - FTSE NAREIT All REITs: 5.84%
  • Commodities – Morningstar Long Only Commodity TR: -0.50%
  • Inflation – Barclays US Treasury TIPS: 4.46%
  • Hedge Funds – Credit Suisse Hedge Fund: -3.31% (prior 3 months through 2/28/2016)

 

 
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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