Posted by Matthew Wolniewicz, Chief Revenue Officer, fi360 Inc. on May 17, 2016
During the first quarter of 2016, domestic equity markets were essentially flat while the bond markets produced positive returns. However, as was the case during 2015, volatility was the name of the game during the first quarter. The year began with the Dow Jones falling nearly 1,000 points during the first week of the year – its worst start in history. Global markets sold off on fears of China’s outlook and a devaluation of the renminbi, oil prices, and the broader global economy. On February 11th, with the S&P 500 down over 10% YTD the fear was “bear market” territory and it would have been hard to foresee one of the biggest rallies since the 2008 financial crises was about to occur. Global markets performance had been much the same with the MSCI Emerging Markets index down about 14% before the rally. In barely a month the S&P rebounded to finish the quarter up 1.3% on a total-return basis, roughly the same return as in 2015. Fixed income was a stronger performer in the quarter, as you would expect during a volatile period and with increased buying demand due to rates in the global bond market being below zero, the Barclays Aggregate Bond Index finished up 3.03% for the first quarter.
What drove the rally? In the first few weeks of February there was a sell-off of global banks. The pressure eased due to actions by the Federal Reserve Bank (“Fed”) and the European Central Bank (“ECB”). The Fed lowered its median expectation for rate hikes during 2016 from 4 to 2, with a resulting target rate of 0.9% vs an expected 1.4%. In March, the ECB delivered a plan to expand its bond purchases to include non-financial debt to support the recovery. They announced plans to purchase $20B EUR a month and buy non-financial investment grade corporate bonds, while also allowing banks that increase non-mortgage lending to be able to borrow at negative rates. It is interesting to note the international markets held their gains despite another terrorist attack in Europe (Belgium) on March 22nd and that Brazil was the world’s top performing market with +27% return in the quarter.
From a Morningstar sector perspective, telecommunications (+7.5% for the quarter, and +11.85% over the trailing 12 months) and real estate (+5.1% quarter, and +2.1 trailing) were the best performing while financial services (-6.1% quarter, -4.3 trailing) and health care (-5.9% quarter, -6.48% trailing) were the worst.
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