First Quarter 2016 in Review
FIRST QUARTER 2016 IN REVIEW
Volatility Spikes, but Equities Prove Resilient
- U.S. economy weathers market volatility as labor market improves and manufacturing steadies. Based on data received so far, first quarter 2016 real gross domestic product (GDP) growth is tracking at 1.5 - 2.0%, following 1.4% growth in the fourth quarter of 2015 and 2.0% growth in the third. Concern about global economic weakness and tightening financial conditions prompted the Federal Reserve (Fed) to delay further rate hikes and lower its internal forecast from four 25 basis point (0.25%) rate hikes in 2016 to just two. Fed policy and a sharp oil rebound have helped stabilize financial conditions. Consumer strength continues to lead the economy on solid labor market gains. Services sector growth slowed over the quarter but remains healthy, while manufacturing, still in contraction, has shown signs of greater stability.
- Stocks erase losses, finish in the green. The S&P 500 Index posted a 1.4% total return during the quarter, rallying off the February low of -10.2%. The quarter was marked by extreme volatility as concerns over the global economy, corporate profits, commodity prices, and currency fluctuations weighed heavily on investor sentiment. The market put in a "double bottom" on February 11 before rallying significantly on the reversal in oil prices, further policy accommodation abroad, and a pause by the Fed in its move toward normalized interest rates. Unlike the rally in the fourth quarter of 2015, this one has been broad based, with 8 of the 10 GICS sectors in positive territory on a year-to-date basis.
- Bonds have standout first quarter but pace is unsustainable. After a challenging end to 2015, fixed income markets enjoyed a strong start to 2016. Interest rates fell across most of the maturity spectrum over the quarter. The overall decline in interest rates led to a 3.0% return for the Barclays Aggregate, the index's largest quarterly return since 2011. The overall decline in rates benefited longer-dated fixed income more so than shorter-dated. Economically sensitive, lower-credit quality sectors also rallied, with high-yield returning 3.4% and bank loans 1.8%. An increase in inflation expectations was a tailwind for Treasury Inflation-Protected Securities (TIPS), which had an impressive 4.5% return during the quarter. International fixed income also had a strong quarter: emerging markets debt returned 5.2%, hedged foreign 4.2%, and unhedged foreign - boosted by a decline in the U.S. dollar - returned 9.1% during the quarter.
- Oil bounced back in the first quarter as production declines in the U.S. began to materialize. WTI crude oil rose by 3.4%, while the broader Bloomberg Commodity Index increased by 0.4%. Oil production in the U.S. declined markedly and certain OPEC and non-OPEC members agreed to discuss a production freeze in early April. The U.S. dollar's bullish trend dissipated and the Trade Weighted Dollar Index returned -4.1%. Agricultural commodities benefited from a stronger Brazilian real and a broadly weaker U.S. dollar.
- The HFRX Systematic Diversified led index gains (3.4%), despite March trend reversals. Strong January and February returns from the HFRX Systematic Diversified Index supported the category's quarterly performance, with short oil, long gold, and long Treasury positioning positively contributing. Long/short strategies declined with the broader market in the first six weeks of the quarter and saw limited participation in the strong March rally, leading to a 2.9% quarterly loss for the HFRX Equity Hedge Index.