Was the first quarter’s financial roller coaster foreshadowing what to expect for the rest of the year, or just much ado about nothing? Markets experienced renewed – and extreme – volatility for four major reasons: the initiation of higher interest rates from the US Federal Reserve, the perception of a looming global recession led by China, plunging crude oil prices, and a potentially contentious US Presidential primary outcome. There were many additional, less significant issues, but all weighed on market psyche.
In the first six weeks of the year, global stocks sold off 11% only to then stage a 13% recovery to finish even for the quarter. Rattled by the markets’ steep decline, the Fed quickly stepped back from its public intention to raise interest rates four times in 2016. Rather than confirming the onset of economic doom, global indicators, including those for China, strengthened throughout the quarter. West Texas crude started and finished the quarter at $38 despite touching $26 in late January. Even the tone of the primary debates softened as the field consolidated. Looked at from a long term perspective, the quarter was mostly noise and little signal in our view.
While there are always many factors in play when market volatility surges, changing expectations about the Fed’s intentions accounted for much of it in the past quarter. Historically, mid-cycle monetary policy transitions have resulted in increased volatility and disappointing returns for a period of digestion before continuing economic growth drives markets higher. Such has been the case over the past year. Given that global fundamentals remain largely positive and are broadly improving, we would expect better returns for risk assets in the year ahead.
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