Q1 2016 Market Summary

Q1 2016 Market Summary

 

The quarter commenced in volatile and rocky fashion as the market continued to digest a world in which the Federal Reserve would no longer provide stimulus through monetary easing.  Stocks were also pressured by the decline in crude oil that dipped to $28 per barrel in late-January.  Although lower oil prices can benefit the economy via stimulating consumer spending; investors were largely concerned with the spill-over effects of oil company bankruptcies and its impact on credit markets.  From January to early February we experienced oversold conditions in stocks and high-yield credit markets, and extremely negative investor sentiment. Market participants were concerned that the world’s central banks were not able to stave off a slowing growth environment, and a potential recession in the U.S.  At the depths of the sell-off, the S&P 500 was down more than 10% year-to-date, and existed as a swift reminder of the China-induced decline in the summer of 2015. 

 

S&P 500 Price Chart

Source: Bloomberg.com

 

Fast forward a month-and a half, and investor sentiment looks very different; perhaps influenced by a rose-colored lens. A rebound in crude oil on the back of talks of an OPEC output freeze, helped alleviate downward pressure on markets.  Although the impact and effectiveness of such a freeze remain in question, the sector was grasping for any positive news to hang their hat on.  Stocks have been trading very closely with crude oil prices in recent months and have been following their upward momentum. 

 

With extreme conditions, either oversold or overbought, a reversal can be swift and dramatic.  This seems to have been the case in the most recent market rally. An oil price recovery and some favorable economic data provided just enough tinder to spark a sharp reversal in sentiment and in prices that caught many off-guard.  Investors looking to time an entry or exit point can be left bewildered by the erratic daily gyrations, and taken off-path from your long-term objective.  Don’t fall into the trap. 

 

As of this writing, one week from the end of the quarter, stocks are nearly flat for the year. One could describe the experience and movement of the S&P 500 as a true rollercoaster ride; a few dips and climbs, but essentially back to where we started.  However, there have been pockets of outperformance in certain sectors. Although representing a smaller percentage of the S&P 500, Telecommunications and Utility companies have posted double-digit gains year-to-date.  In contrast, a significant portion of the S&P 500’s lack of gains can be attributed to the Financial and Health Care sectors.  They represent the second and third largest portion of the index’s composition and have lagged in performance for the first three-months of the year.  This confirms our thesis for the year that gains will be harder to come by, and stock selection will come back into focus.

 

Cory Nakamura CFA, CFP®

Chief Investment Strategist and Financial Advisor

 

CFA Charterholder

CERTIFIED FINANCIAL PLANNER™ professional

Honolulu|Hawaii

 

 

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