As the first quarter of 2016 drew to a close investors could be excused for feeling like they were disembarking from the world’s longest rollercoaster ride. The U.S. stock market, as measured by the S&P 500, finished the quarter up a modest 1.35% and the U.S. bond market, represented by the Barclays Aggregate Index, was up a healthy 3.03%. But the story of the first quarter was not the destination, but the tumultuous journey markets took over the preceding three months.
From the very first trading day of the year, January 4, it appeared that markets would see a continuation of the cycle of concern and volatility that marked so much of 2015. Equity markets opened the year down and proceeded to sell off with great enthusiasm over the next six weeks. By February 11 all of the major U.S. stock indices were down more than 10% for the year. That day the S&P 500 ended down 14.2% from its May 2015 high and seemed well on its way to bear market territory of ‐20%.
But then a strange thing happened. The concerns that had been plaguing the markets began to be addressed one by one. The seeds of this market rebound were probably planted on January 27 when Federal Reserve chair Janet Yellen failed to raise rates and acknowledged the economic warning signs emanating from overseas. February 11, the stock market nadir, was also the date that oil prices bottomed, reaching a 13‐year low of $26.21 per barrel. When oil prices stabilized and started to rise it provided some much needed relief for stressed energy firms as well as to banks and other lenders that had exposure to the country’s energy complex. Over the ensuing weeks markets continued to receive a steady stream of supportive news. Stronger than expected economic data in the U.S. and additional stimulus measures from the European Central Bank seemed to be particularly important contributors to more positive market sentiment. This string of bullish news was topped off by Fed chair Yellen in mid‐March when she guided markets to a lower number of planned interest rate hikes in 2016.
While U.S. large cap stocks and the U.S. bond market ended up with reasonably good performance in the first quarter, other asset classes weren’t quite able to claw their way back to even by quarter’s end. As has been the case for some time now, large cap stocks outperformed small cap stocks for the quarter, though small cap stocks did rally more in March. The Russell 2000 was up 8% in March leaving the index down 1.52% for the quarter. The U.S. market also continued to outperform foreign developed markets with the MSCI EAFE Index down 3.01%. One big change in the first quarter was the performance of emerging markets. A combination of strong performance in Latin American markets and a weakening U.S. dollar led to strong emerging markets performance for U.S. investors (up 5.71%).