Spring 2016 Market Commentary and Outlook

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The market volatility of 2015 continued into the first quarter of the year. Although by itself, the S&P 500’s 1.4% return for the quarter appears mild, the route it traveled to get there was rather turbulent. The market began the year with a heart‐stopping plunge of 6% in just the first five trading days. Declines continued until mid‐February, with a total drop of 10.5%. As the market fell, investor sentiment and media commentary turned quite negative. There were concerns surrounding energy prices, economic deceleration in China, and the growing fear of a potential recession in the United States.

Fortunately, the market turned around in dramatic fashion. From the February lows, the S&P 500 staged an impressive climb that totaled 12.6%, resulting in a 1.4% return for the quarter. With a small gain to start the year, the market faces the similar scenario as it did at the end 2015. Stocks appear to be close to fair value, so the bullish case for stocks going forward depends on continued economic and profit growth.

Looking objectively, we believe there is a compelling case for the economy to continue growing. A significant driver for the economy has been the steady and substantial growth in employment. The labor market has enjoyed 66 consecutive months of job growth and shows no signs of slowing. The low cost of energy has the potential to significantly benefit consumers and most businesses. Historically, the positive effects of lower energy prices are not fully realized for at least 6‐12 months, so we should begin to see these results later this year. Low interest rates and continuing low inflation are also positives, making money cheap to borrow and keeping price levels steady. These factors combine to create a fertile environment for further economic expansion. Economists expect U.S. GDP growth to pick up in the coming quarters and grow 2% to 2.5% this year.

Energy prices have been an area of particular interest for investors, especially here in Houston. As the graph below demonstrates, the stock market has become highly correlated to changes in the price of oil. This is unusual, as stock prices and oil generally move independently of each other. Since the 13‐year low of $26 per barrel set in February, West Texas Intermediate has risen past $40 per barrel, a more than 50% increase. If the current relationship between oil and stocks continues, further improvements in oil  prices should be beneficial to stock prices.

Correlation WTI vs. S&P500

 

Another area of focus for investors has been the Federal Reserve and their intentions for increasing interest rates. The Fed increased their benchmark interest rate 0.25% in December when it also projected four more 0.25% increases in 2016. Following the market volatility and soft economic readings during the first quarter, the Fed appears to have slowed their trajectory for increasing interest rates. The expectation among market participants is that the next interest rate increase will likely be announced at their meeting in June. Their decision will depend a lot on what happens in the economy over the next two months.

While the Federal Reserve is biased towards raising rates, the European and (more recently) Japanese central banks have lowered their benchmark interest rates below 0%. This negative interest rate policy, or NIRP, was implemented by policy makers in an attempt to discourage investors from stockpiling their cash. Their hope is that NIRP will encourage banks and investors to lend and invest more freely in areas that will create jobs and stimulate their economies. At this point, we’re waiting to see if these policy moves will be effective.

After a difficult quarter, we expect that market volatility could continue for the foreseeable future. But we remain cautiously optimistic that the economy will continue to grow and that corporate earnings will rebound more quickly than some anticipate. As always, it is impossible to know what will happen in the near‐term, but we remain confident that investors will be rewarded for sticking with their long‐term plan and patiently waiting out these periods of market instability.

Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who is in need of financial advice, we will be pleased to speak with them to see if we can help.

Horizon Wealth Advisors
Horizon Wealth Advisors is a Houston-based, privately owned, fee-only financial advisor established in 1999. Our mission is to develop long-term relationships with thoughtful, successful individuals, families, and organizations by supporting and assisting them in achieving their financial goals.

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