Wow that was a crazy ride. And we did not just test drive the new 2016 Porsche 911 GT3 RS (but we sure would love to!). No, we were referring to the wild ride in the U.S. equity market during the first quarter of 2016:
In the first 28 days of 2016, the Russell 1000 Index, made up of the largest 1,000 companies in the U.S., hit the brakes hard and was down 11% (in red, left side of above chart). There were a number of valid reasons for the treacherous decline offered by market pundits (pick your poison: China, oil prices, presidential election, etc.). For us it was always the Federal Reserve Bank's future monetary policy intentions after increasing short-term interest rates in December for the first time in almost 10 years. Outlined in our last Market Perspective post in 2015 entitled “On Star Wars & the Fed's Gambit,” our key concern and question remains relevant:
The unprecedented nature of the past seven years raises questions about what might happen in the future and adds an air of uncertainty about the timing of the decision. Raising interest rates could derail the fragile business cycle expansion we are experiencing today. Since the Great Recession in 2008, the U.S. economy has only averaged 2% annual growth (measured by Gross Domestic Product, the aggregate value of the economy's total output). This rate is much lower than the 3% enjoyed prior to 2008-2009. For an economy stuck in second gear, why make it harder to grow at a faster rate by increasing the cost to companies and consumers to borrow money?
At that time, the Fed predicted four increases to short-term interest rates in 2016. Our beliefs are that this "hawkish" trajectory would be too much, too soon, and it could kill the fragile business-cycle expansion. Global capital markets reacted accordingly as mentioned above.
Throughout February, the Fed’s policy tune changed. In a series of public speeches, Vice Chairman Stanley Fischer suggested four rate hikes might be too much. This new "dovish" rhetoric was explicitly endorsed during their March meeting and in a recent speech by Chairwoman Janet Yellen: the Fed now foresees only two rate hikes in 2016.
This change in rhetoric caused capital markets to stabilize and rebound similar to the Porsche going 0-60 mph in 3.3 seconds. After bottoming on February 11th, the Russell 1000 Index was up 13% through March 31st (in green on right side of above chart) and finished the quarter in the black. According to Bloomberg, this was the first quarter since the Great Depression where the index fell more than 10% intra-quarter only to finish higher.
A wild ride indeed!
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