Investment Review for First Quarter 2016

At their worst level, global stocks were down 19.2% in early February from the 52-week high reached during May of the prior year. The drop was just shy of the 20% decline required for entry into a bear market. While global stocks as a whole did not enter bear territory, there were pockets of the stock market that suffered larger losses. Specifically, domestic small companies, foreign developed large companies, and emerging market stocks had fallen 20.0%, 22.5%, and 34.2% respectively at their worst point in the sell-off.

Just when sentiment seemed to be at its worst, a reversal began in mid-February. With the help of additional easing from global central banks and rising oil prices, global stocks appreciated through the end of the quarter. As a whole, global stocks rose 13.1% from their recent lows. Some harder hit areas of the stock market, such U.S. small company stocks and emerging market stocks, appreciated even more, gaining 17.1% and 21.9% respectively.

Major asset class returns.

Additional monetary stimulus.

In an effort to give their economies a boost, both the Bank of Japan and the European Central Bank accelerated their monetary easing in early 2016. First, the Bank of Japan surprised financial markets with an unexpected reduction in its overnight interest rate on excess deposits to -0.1%, its first move into negative territory. Next, the European Central Bank (ECB) reduced its overnight interest rate on excess deposits even further to -0.4%. In addition, the ECB increased its monthly asset purchase program by €20 billion, and made financing available to banks at interest rates ranging from 0.00% to -0.4%.

Domestic economic growth.

Fourth-quarter economic growth was revised up from the initial estimate of 0.7% to the final estimate of 1.4%, bringing full year 2015 growth to 2.4%. Even with the upward revision, the fourth-quarter growth rate still trailed the third-quarter growth rate of 2.0%. This pace is well below the trailing five-year average of 2.0%. In addition, with growth for the first three months of this year projected to be well below 1.0%, it appears that below-trend growth has continued into 2016.

Oil and midstream Master Limited Partnerships.

Oil prices continued to slide in early 2016 and reached a new low of $26.01 on January 16. Prices rebounded and eventually briefly passed the $40 level due to speculation that Russia and Saudi Arabia could broker a deal to freeze output at current levels. Even with the potential for a deal, oil drillers, producers, and related businesses continue to suffer. Even Master Limited Partnerships (MLPs) specializing in midstream services such as transportation, gathering, processing, and storage have seen their share prices fall as concerns mounted.

Brussels bombing.

On the morning of March 22, three coordinated bombings occurred in Belgium. In these attacks, 32 victims lost their lives and over 300 more were injured. This tragic loss of life and the heightened concern surrounding future terrorist attacks has led many to call for tighter border controls, increased security measures, and an inward retreat. Unfortunately, a complete haphazard closing of borders and a retreat to protectionist economic policies is not only detrimental to personal freedoms, but is also detrimental to long-term economic growth and prosperity.

Brexit.

A referendum to determine whether the U.K. should remain a member of the European Union will be held on Thursday, June 23. Currently the U.K. is the second largest economy in Europe, home to numerous multinational corporate headquarters, and home to the second largest global financial center. With so much at stake and polls too close to call, it is likely that the uncertainty will lead to increased volatility in the financial markets over the next few months.