2016 got off to a difficult start for investors, but the markets managed to close out January on a modest rally. That difficult start may put future interest rate hikes in jeopardy despite the Federal Reserve’s recently initiated plan to gradually raise interest rates (from zero) over the next few years.
Domestic Equity
U.S. stocks had the worst start to a calendar year ever in 2016, as major domestic equity indices were off by more than 10 percent by the third week of the new year. Curiously, major market fear indicators, such as the VIX, were not buzzing like they were last August when a similar correction occurred (a correction from which the market ultimately recovered.) Explanations for the most recent correction ranged from China to oil, weak manufacturing, an impending global recession and, of course, the Fed. None of the fears are necessarily new, but China and oil did get off to a rough start this year and some economists estimated the actual impact of the Fed’s quarter point interest rate hike last December to be closer to a full percentage point. Unlike China and oil, the Fed got a chance to soothe markets as Fed chair Janet Yellen reiterated that the Federal reserve board thinks the U.S. economy is strong (despite a weak Q4 GDP of 0.8%) and that they will be considerate of global markets when contemplating future rate hikes. Markets interpreted this as the Fed backing off on their initial promise of four quarter point hikes in 2016. Now most analysts don’t anticipate another hike until September. Right on cue, the markets responded, rallying to close the month recording the highest gaining day of the year on the last trading session in January.
Foreign Equity
What a mess global equities have become. Just a year ago, many speculated that global stocks would surge as investors left domestic stocks in favor of foreign. Just the opposite has transpired. China does not seem to have much of a handle on its economy or markets. Brazil, the world’s ninth largest economy by nominal GDP, is in the middle of massive recession. Puerto Rico defaulted on its debt obligations. The U.K. is attempting to leave the disintegrating European Union. All the while, the European Central Bank is promising to inject more money into the EU to keep it afloat. Additionally, Japan just joined a few European countries in adopting a negative interest rate policy, not to mention the negative effect low oil prices have had on a number of countries. The world outlook is weak, and that weakness will likely be magnified should the U.S. economy slip.
Real Estate
Real estate followed a path similar to that of the U.S. stock market through January. Getting off to a brutal start to the year, real estate had a slight rally to close out the month. Perhaps Ms. Yellen’s soothing words have reached the real estate sector – as well as the prospect of sustaining low interest rates for the foreseeable future, which could re-energize the real estate market.
Commodities
More of the same story here: oil fell again to start the new year and briefly dipped below $30/barrel for the first time in more than a decade. Prices stabilized to close out January, giving some hope that we’ve finally reached the bottom of this oil crisis. Only time will tell, as oil has consistently fallen through the bottoms over the last two years. Precious metals still show low investor interest and will likely stay that way until the U.S. is firmly in a bear market.
Fixed Income
Bonds remain a very tricky sector to get a feel for. Just as fixed income starts to rise with the promise of rising interest rates, the Fed speaks noncommittally of future hikes, creating an air of uncertainty around the future value of interest rate-sensitive investment vehicles. As we’ve mentioned before, with such weak guidance on future interest rate hikes from the Fed, this asset class has an undesirable risk/reward ratio.
Chart as of 1/29/16 Past performance is not indicative of future results. Other asset classes or investment vehicles may be used in client portfolios and client portfolios may not hold all positions of the model at the same time as the model. This chart and its representations are only for use in correlation to the proprietary timing model by Arkenstone Financial, Registered Investment Advisor. Actual client and All Terrain Portfolio(TM) positions may differ from this representation.
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