First Quarter 2016 Market Commentary Domestic equity indices finished the quarter mixed following a period of heightened volatility to start the year. International markets also faced dispersion as developed nations struggled with higher debt burdens and lower growth. Emerging markets benefited from a lower U.S. dollar and dovish stance by the Federal Reserve. All fixed income sectors ended in positive territory during the volatile first quarter, especially emerging markets debt, which has been the best performing asset class thus far in 2016. For the quarter, the S&P 500 Index gained 1.3%, while the Russell 2000 Index of smaller companies fell 1.5%. The industrials, telecommunications, materials and utilities sectors were the top performers, while financials and healthcare were weaker. Across market capitalizations, mid-cap securities generally outperformed their large- and small-cap counterparts. Across styles, value outperformed growth across all market capitalizations. U.S. fixed income markets were positive across all asset classes. Long-maturity Treasuries outperformed shorter-dated issues as interest rates fell. Investment-grade corporate securities were higher as utility- and industrial-related credits were top performers. Lower quality, higher yielding corporate securities generally experienced gains as well. Other sectors, including mortgage-backed securities (MBS), asset-backed securities (ABS) and municipal bonds, ended higher as well. International markets were mostly negative as the MSCI EAFE declined 2.9%. Among the largest European markets, France gained 0.2% while Germany fell 2.4%. Italy and Spain posted losses of 11.7% and 4.0%, respectively. Within the Pacific region, Japan declined 6.4%, while Australia gained 2.1%. In the emerging markets, the MSCI EM ended 5.8% higher following a strong rebound by some of 2015 s worst performing countries, namely Brazil, which returned 29% in U.S. dollar terms.
World Market Recap Economy According to the third and final estimate of economic growth released by the Bureau of Economic Analysis, fourth quarter GDP increased at an annual rate of 1.4%. This reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment and federal government spending. These were partially offset by negative contributions from private inventory investment, falling exports, nonresidential fixed investment as well as state and local government spending. The advance estimate for first quarter GDP is due out on April 28 th, 2016. The FOMC maintained the existing target range for the federal funds rate in the range of 0.25% - 0.50% during its March meeting. The committee reiterated that they expect only gradual increases in interest rates which will be driven by changes to their economic outlooks as new data is released and analyzed. Median projections for the medium- and longer-term federal funds rate were lower compared to the committee s expectations released in the December meeting. During Ms. Yellen s press conference, she reiterated that there is no prescribed path for interest rates, despite the committee s median expectations, and that data will determine the path of changes to the federal funds rate. The next FOMC meeting is scheduled for April 26 th -27 th, 2016. Fixed Income U.S. Treasury yields declined during the quarter as the rate on the 10-year fell 50 basis points to end at 1.77%. The rally in prices (decline in yields) that occurred in the front half of the quarter failed to reverse as expectations for interest rate increases by the Fed remained low. Investment grade corporate securities were higher during the quarter. The utilities sector, which advanced 5.0%, was the strongest performing corporate credit sector. Industrial-related credits followed closely, gaining 4.7% while financial-related credits gained 2.3%. Lower quality, higher yielding corporate securities finished higher as well. For the quarter, BB-rated issues gained 3.9%, B-rated issues climbed 2.5%, while CCC-rated credits rose 3.8% after strong relative performance in March. Fixed rate MBS gained 2.0% throughout the quarter. The Commerce Department reported that housing starts increased at a rate of 5.2% last month to a seasonally adjusted annual rate of 1.8 million, which is the highest level in five months. Municipal bonds increased 1.7%. Fitch downgraded nearly $10 billion worth of Chicago s debt to one notch above junk during the month following a ruling by the state Supreme Court that the city would not receive assistance from the state for unfunded pensions. S&P downgraded the city s credit rating in July to three notches above junk while Moody s credit rating for the city is already in junk territory.
U.S. Equity U.S. stocks finished mixed during the quarter. The S&P 500 Index rose 1.3%, while the technology-heavy NASDAQ Composite declined 2.4% and the Dow Jones Industrial Average gained 2.2%. Telecommunications and utilities were the top performing sectors during the quarter, gaining 14.2% and 14.1%, respectively. These sectors performed well during the more volatile first part of the quarter and continued their robust gains throughout the month of March. Energy gained 2.7% with oil and gas servicers and producers outperforming their alternative energy counterparts. Despite natural gas and oil prices experiencing negative returns for the full quarter (-21.7% and -5.7%, respectively), performance later in the quarter was strong enough to result in positive gains for the associated companies. The technology sector fared well throughout March resulting in a 1.6% return for the quarter. The electronic office equipment and computer hardware industries outperformed the rest of the sector, with expectations that these companies will benefit from others investing and/or updating their office technology. A continued topic through the end of the quarter involved Apple and the FBI with the latter managing to obtain data from phones used in the San Bernardino terrorist attacks without Apple s help, which effectively brought an end to the lawsuit and dispute. The healthcare sector was the worst performing sector, declining 6.4% during the quarter as the biotechnology and pharmaceutical industries lagged significantly. Valeant Pharmaceutical remained in the headlines as its share price continued to fall. The most recent woes stemmed from the firm s earnings call, which took place mid-march and was followed by an announcement that CEO Michael Pearson would be replaced. Subsequently, Moody s downgraded the company s credit rating, citing operating uncertainties. International Developed Markets Canadian equities soared 11.5% as Statistics Canada, the country s national statistical agency, announced the economy grew 0.6% in January, the strongest reading since mid-2013. January s better than forecasted growth was the third straight month of relatively stronger gains in GDP. Economists partially attributed the pick-up in economic activity to increased government spending as Prime Minister Justin Trudeau successfully passed his first budget in office. Other bright spots for the economy included growth in the retail, construction and energy sectors. A lower Canadian dollar finally paid dividends as the manufacturing sector experienced broad gains as exports increased. Economists expect this broad rally due to currency effects to have a lasting impact on the economy over the next year and a half. The U.K. equity market fell 2.3% as the Markit/CIPS Services Purchasing Managers Index (PMI) rose to 53.7 after falling to a near three-year low of 52.7 in February. The services sector, Britain s largest, accounts for approximately three-quarters of the economy. The latest reading, in conjunction with poor performance in both the manufacturing and construction sectors, weighed heavily on investors and caused many economists to lower their growth outlooks. Moreover, investors continued to be wary of a potential Brexit from the European Union and the potential for further budget cuts.
Eurozone equity returns were mixed throughout the quarter. PMI data indicated an increase in economic activity in March as industrial production and construction activity inched up. However, the currency union continues to face strong headwinds as the European Commission reported consumer and business confidence fell for the third straight month in March as exports disappointed. The poor data compelled the ECB to cut its growth forecast for 2016 to 1.4% from 1.7%. In an effort to spur on economic growth and combat inflation, The ECB announced it had lowered the deposit rate to -0.4% while earmarking an additional $22 billion dollars in stimulus funding. ECB President Mario Draghi announced an expansion to the central bank s bond purchase program to include highly-rated corporate securities. Within the Pacific region, Australia gained 2.1%, while New Zealand surged 12.0%. Japanese equities sold off 6.4% as factory output fell the most since 2011 when the Tohoku earthquake devastated cities across north central Japan. In an effort to spur inflation and increase domestic demand, the Bank of Japan has flooded the currency markets. However, due to increased risk-off trading the yen climbed to a 17-month high against the U.S. dollar as investors purchased safe haven Japanese government bonds. Some economists have expressed the belief that Prime Minister Shinzo Abe may expand the already massive stimulus efforts known as Abenomics by delaying a planned increase in the sales tax to promote spending and economic growth. International Emerging Markets Within Asia, China fell 4.8%. The Caixin PMIs for both the manufacturing and services sectors rose throughout March as stimulus efforts have appeared to have at least short-term effects on the economy. The People s Bank of China reiterated its commitment to accommodative policies should the economic environment warrant further easing. India posted a 2.5% loss despite fresh stimulus efforts from the Reserve Bank of India. While India continues to be one of the fastest growing economies, questions have arisen as to the sustainability of its growth. Industrial output, coupled with weaker private investment and lower exports, caused bank officials to cut the rate at which it lends to banks to 6.5%, the lowest level in five years. Among other large Asian markets, Taiwan added 7.7% and South Korea gained 5.2%. In Latin America, Brazil rallied 28.6% on news that impeachment proceedings against embattled President Dilma Rousseff were gaining traction through congress. Ms. Rousseff s approval rating fell to 10% as Brazil s largest political party, PMDB, voted to leave the current government coalition with Ms. Rousseff s Worker s Party. Markets now trade in-line with the progression of impeachment proceedings as investors hope for new, more pro-market leadership. The country faces strong headwinds as the central bank lowered its GDP forecast by 1.6%, calling for a 3.5% contraction throughout 2016. Elsewhere in the region, Mexico added 8.5% and the smaller Chilean market advanced 13.3%. Among EMEA countries, South Africa experienced a 13.9% gain. In the Middle East, Turkey rallied 21.7%, while Egypt fell 5.8%. Within Eastern Europe, Hungary advanced 17.3%, while Poland gained 13.9%. Russian stocks soared 15.8% as energy prices ended the quarter on a positive note.
*All indices are unmanaged and investors can not actually invest directly into an index. Past performance is not indicative of future results. The S&P 500 Index is based on the average performance of 500 of the largest stocks monitored by Standard & Poor s. Russell 2000 Index measures the performance of small-cap stocks. MSCI EAFE is a market-cap weighted index representing 20 developed markets outside North America, including 14 European countries and 6 Pacific countries. MSCI Emerging Markets is a market-cap weighted index representing 26 emerging countries. This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates; L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any opinions expressed herein reflect our judgment at this date and are subject to change. Past performance does not indicate future performance.