April 07, 2016

Monthly Market Summary – March 2016

The “risk-on” sentiment that sparked the global rally in mid-February continued throughout March. As a result, the major equity, bond, and commodity indices we follow and that are shown below all posted a positive return for the month.  The rally erased the previous year-to-date negative returns for the large and mid-cap U.S. equities, emerging markets, and commodities indices.

Four key elements seemed to fuel the positive sentiment that drove most asset prices higher. One element that was particularly relevant to U.S. equity markets was that oil prices rose.  The oil price rally continued for much of the month, despite record high inventory levels, due to expectations that oil producers will discuss a production freeze at their meeting in April.  Equity markets moved remarkably in tandem with oil prices.  A second key element that boosted asset prices was the almost 4% decline in the U.S. dollar due to reduced expectations for higher interest rates because of concerns about the strength of economic activity.  In particular, the lower dollar provided a boost to emerging markets assets and U.S. bonds.  A third positive element was that worries about the U.S. falling into a recession receded as market participants focused on encouraging reports such as job openings, vehicle sales, and durable goods orders.  The fourth key element was that the European Central Bank (ECB) and the U.S. Federal Reserve (Fed) showed that central banks are willing to continue to provide support to financial markets.  The ECB surprised market participants with a series of actions aimed at encouraging banks to lend to spur economic activity and inflation. These actions included cutting a key lending rate, the refinancing rate, to 0% and lowering the deposit rate to -0.4% from -0.3%.  The ECB also made changes to its monthly bond purchase program by expanding the size to €80 billion from €60 billion and including investment-grade, euro-denominated, non-bank corporate bonds in the program.  The ECB also announced a new series of longer-term refinancing operations (LTRO) with maturities of four years.  The Fed indicated a more dovish course since it now expects only two interest rate increases in 2016 rather than the four hikes it expected after its December 2015 meeting.

Market Indices –March 2016

March Monthly Chart of Returns

In U.S. equity markets, the mid-capitalization (cap) index had the best return for the month followed by the small-cap index, and then the large-cap index. Value stocks outperformed growth stocks regardless of market cap.  Each of the ten industry sectors had a positive return in all of the market cap categories.  The energy sector had the best return for the month in each of the three market cap ranges due to the 14% gain in oil prices during the month. The materials sector had the second best returns in the mid and small-cap indices due to the weaker U.S. dollar.  Healthcare had the lowest return among large and mid-cap stocks.  Healthcare has been a laggard largely due to weakness in biotechnology stocks where drug pricing continues to be a concern and has been the focus of congressional hearings.  The more defensive consumer staples and telecom sectors had the lowest returns among mid and small-cap stocks.

The MSCI EAFE index of developed international country equities and the MSCI Emerging Markets (EM) index each had a strong positive return for the month. March was the third consecutive month that the EM outperformed developed international.  Currency was a positive factor to the return for U.S. investors in foreign stocks.  For example, the return for the EM index on a U.S. dollar basis was 13.2% compared to the local currency return of 8.3%.  Several EM country indices had a double-digit gain for the month.  The rally in emerging markets stocks was driven mostly by increasing commodity prices and the decline in the U.S. dollar.  Political factors also had an important impact.  For example, Brazil was a top performing country with a gain of 30% in March boosted by higher commodity prices but also in reaction to the possible impeachment of President Rouseff.  The China index posted a gain of almost 12% for the month even though economic data is still weak with both manufacturing and non-manufacturing activity moving lower again.  China’s exports fell 25% in the most recent report which was much more than expected and imports fell 13%.  In developed international markets, commodity heavy economies such as Canada, New Zealand, and Australia were among the best performing markets for a second consecutive month due to the rebound in commodities prices.  In both the EM and developed international indices all ten industry sectors had a positive return.  Similar to the results in U.S. equity markets, the energy and materials sectors had the best returns and healthcare had the lowest return.

The Barclays U.S. Aggregate Bond index had a return of 0.9% for March. Treasury bond yields moved higher in the first half of the month with the 10-year bond almost reaching 2.00% before declining again to end the month at 1.78% which is near the level at the start of the month.  Corporate bonds outperformed Treasury, mortgage-backed, and municipal bonds.  The Barclays Corporate High Yield index continued to rally along with the equity market and posted the highest return among major bond market sector indices for the month with a return of 4.4%.

The Bloomberg Commodity index had a return of 3.8% for March. Energy led the broad commodity index advance.  The price of West Texas Intermediate crude oil rose 14% as market participants look forward to the meeting of oil producers in April where a possible production freeze is expected to be discussed.  Natural gas prices rose also.  The industrial metals sub-index was little changed in March as economic data continues to show slowing in China.  Gold also ended the month about flat after a double-digit gain in February but silver advanced over 4%.  The agriculture sub-index was up over 4% with the grain prices moving higher but livestock prices dropping.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

After the recent rally equities and bonds are fairly to richly valued compared to historical averages. The outlook is for modest global economic and earnings growth.  For example, the Fed in March revised its forecast for U.S. gross domestic product growth to 2.2% from 2.4%.  In this environment we expect volatility (swings in asset prices both up and down) to continue to be elevated as investors react to news and data reports.  Therefore, we continue to recommend using periods of market strength to raise any cash needed to support spending needs over the coming 12-24 months.

No changes were made to the tactical asset allocation recommendations during the month. We recommend an equal weight position in each equity market sector (U.S. large-cap, mid-cap, and small-cap stocks as well as developed and emerging market equities).  We continue to favor hedge fund strategies over fixed income for the lower expected volatility portion of portfolios since yields are near historically low levels.  Our fixed income recommendation is to underweight this sector and to maintain a focus on short to intermediate term bonds.  Non-Treasury bonds are favored for the yield advantage they provide compared to Treasury bonds.  Finally, as our expectation is for a moderate rate of inflation to continue, we recommend an equal weight to real assets.

The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

 The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.