State of the Markets
Despite a volatile start, the first quarter ended with modestly positive performance across most asset classes. The first six weeks of the year saw a significant dip in risk assets across the globe, followed by a significant rebound through the end of the quarter. It was a test of patience and endurance which, hopefully, is behind us.
The total returns for major asset classes are below.
January began with an acceleration of the negative outlook that dominated the headlines towards the end of 2015. The fear was that the global economy was slowing and likely to fall into a recession, while low oil prices were a sign that the worst was yet to come. However, this worst case scenario never materialized and the markets have since recovered.
The Battle between Fear and Greed is Never a Tie
We’ve written before that public markets are both a blessing and a curse. A blessing in that they allow us to buy or sell thousands of companies at a time with remarkable ease and efficiency. At a moment’s notice, we can purchase a diversified pool (mutual fund or ETF) of thousands of businesses for the price of a few cups of Starbucks coffee.The curse is that we must suffer the insult of daily prices to participate in the ownership of publicly traded investments. Sometimes the fear and greed that drives daily price movements builds upon itself leading to major market swings (in both directions) that are not grounded in reality.
The chart above covers the period from 2010 through the end of March, 2016 and shows both the S&P 500 (top) and the VIX index (bottom). The VIX, referred to as the fear Index, is a measure of volatility in the market and often spikes during market declines. Over this 6+ year advance, there have been multiple occasions when fear became the predominant influence and the market pulled back in anticipation of bad news. However, when these potential events (Greek default, European banking crisis, double-dip recession, Ebola epidemic, etc.) did not materialize or the consequences were less than expected, the markets recovered and resumed its upward trajectory based on long-term fundamentals.
After a rocky start to 2016, we are hopeful that the economy will find stronger footing, followed by a recovery in corporate earnings, which will set the stage for a modest advance in equity prices for the rest of the year.