The S&P 500 ended the first quarter of 2016 up almost 1%. The stock market during the first quarter was a roller coaster ride that just happened to end about where it started.
It is difficult to pinpoint what caused the market volatility in the first quarter, but here are my thoughts:
As 2016 began, the big winners of 2015 (mostly overvalued stocks) were sold. This may have been to delay large capital gains until Tax Day, 2017.
The Federal Reserve raised interest rates at their December 16th meeting. At the margin, higher interest rates make some assets less attractive. The selloff could have been a hangover from the Federal Reserve’s action and anticipation of more interest rate hikes.
Oil was crashing due to record inventory and high production levels. This called into question the viability of many energy companies and highlighted this potential risk to the economy.
Meanwhile, the economic data out of China, Europe and Japan didn’t look good, resulting in fears of a global recession.
At the low, these headwinds came together to knock the S&P 500 down about 10% on a year to date basis.
The decline was something we had prepared for, so as the stock market dropped, we added to our clients’ equity positions.
Typically, assets become cheaper during times of, or because of uncertainty.
It is my opinion that there is always great uncertainty about the future. To take that thought further, if the future is always uncertain, then you want to buy assets only when they are priced for uncertainty: When they are inexpensive. It must be said that I use the word ‘inexpensive’ as a relative, not an absolute term. Perhaps someday stocks will be inexpensive on an absolute basis, but I don’t believe we have seen that so far in 2016.
In the 12/31/15 Market Commentary I said the following:
Unfortunately, the recent stock market volatility may cause the Federal Reserve to rethink the additional 2016 interest rate hikes.
This proved to be prescient (so far!). At the February meeting, not only did the Federal Reserve not raise interest rates, but they signaled that they expect two fewer interest rate hikes in 2016 than was previously thought.
We cannot know what the rest of the year will bring for the markets, but one thing is certain: If there is any turmoil, we will take advantage of the assets that are priced for uncertainty.