As we entered 2016, the factors that led to the volatility throughout the 2nd half of 2015 persisted. After one of the worst ever starts to a year, a rally in March led to the S&P 500 ending positive for the quarter.
Uncertainty in the financial markets leads to volatility. There was uncertainty about the price of oil, US interest rates and the overall health of the global economy.
One area of uncertainty was fear that a seemingly endless drop in oil prices would lead highly leveraged oil companies or drillers to default on their debt payments. Concerns were that defaults could possibly put enough stress on banks to send us into another global financial crisis. When oil prices appeared to stabilize in early March along with some positive OPEC commentary, the likelihood of a financial crisis diminished and brought a sigh of relief to investors.
Another concern is US interest rates and the activities of the Federal Reserve. Too much transparency by the Fed may not be a good thing. Endless public commentary by Fed officials had markets confused as to whether the next step for the Fed was to raise rates or actually reverse the December increase. Money managers found it difficult to position portfolios not knowing whether they should be positioned for a Fed rate hike or decrease. Much of the uncertainty was trying to figure out if weakening international economies would pull a strengthening US economy down or if the reverse would happen. As the quarter progressed, the US data did not show signs of deterioration and gave investors hope that a strengthening US may help global economies.
Looking out towards the remainder of 2016, we expect volatility to remain. The US presidential election will undoubtedly cause markets to fluctuate as candidates make clear their economic policies. The health of world economies and monetary policy will also strongly affect which direction the markets head.
From a portfolio allocation standpoint, although the S&P 500 is not overvalued as it typically is at the end of a bull market, we are currently in the 3rd longest bull market in US history. We are not implying that the bull market in the US is coming to an end, however, there may be more room for growth in international markets if there is any sign of economic stabilization. If economic conditions begin to stabilize or improve overseas, we may look for opportunities to take advantage of undervalued areas outside the US. Much like we did during the recent pullback, as long as economic data in the US continues to look positive, we will take advantage of any pullback as a buying opportunity.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.