Only the very brave, or the very foolish. And that’s the point of the adage: As long as you remain convinced that underlying economic fundamentals have not changed, trying to call the bottom of a volatile market is just as misguided as panic selling into tumbling prices. The “W-shaped” market kicked off by China’s devaluation last August is the perfect exhibit to back up our philosophy of maintaining a long-term view, putting the headlines into perspective, staying diversified and looking for opportunities to buy on volatility.
Things were never as dark as they seemed on February 12, and despite the arrival of daylight saving time they are probably not as bright as they seem today. Purchasing Managers’ Indices, a key measure of industrial activity, have been positive but not exciting; GDP expectations have not improved meaningfully; deflation fears still darken Europe and Japan; and China is still muddling through. High-profile defaults in the energy and mining sectors appear priced in but will likely cause shocks when they materialize, nonetheless. U.S. corporate earnings are still struggling—when the first profits estimates for Q1 came in a week ago they revealed a drop of almost 12% year-over-year, which would be the biggest decline since the depths of the financial crisis.
Markets show signs that they recognize this. For sure, there have been extraordinary rallies in some unloved places. The Brazilian stock market is up 18% on the year, and more than 25% since its mid-February lows. The Brazilian real is up almost 9%. Emerging market currencies as a whole enjoyed one of their strongest rallies ever in March.
After falling precipitously, the price of oil has recovered to finish the quarter near where it began the year; this, in our view, should reduce the uncertainty around the deflationary impulse and the distress levels in the wider economy. There has even been some outperformance of value over growth stocks in the U.S. If sustained, that would represent a bullish reversal of a multiyear trend, which may suggest that investors expect a return to more broad-based economic growth and no longer feel compelled to pay a premium for the most visible earnings.
But not everything fits this script. Gold, considered by many a safe haven asset, has hung on to most of the 20% gain it made during the New Year turmoil. So far, value is leading growth only by a small margin, and the underperformance of smaller companies this year is not characteristic of a full-throttle rally. Where growth and deflation concerns are most acute, stock markets have not drawn the same “W” as they have in the U.S.: Germany is down 6% year-to-date, and both Japan and China are down more than 10% year-to-date.
Market participants are watching the fundamentals and saying, “show me the money.” They know the next leg up in equity market valuations depends upon improving profits in the second half of the year, and while we believe they are likely to get this after the recent weakness, they need more reassurance that the headwinds of the falling oil price and the rising dollar have eased. They want to see clearer evidence that the “Third Arrow” of Abenomics can translate into real economic results. They want to see some inflation in Europe. They want more certainty that China is not planning another surprise currency devaluation.
We’d like further evidence of stabilization and improvement in these areas before we add aggressively to risk, too—but we are also prepared to hold fast to our steady-but-cautious outlook when markets have their next tantrum, as they inevitably will. We know that “time in the market” is critical, because it is often hard to see the turn of the cycle until it is behind you.
In Case You Missed It
- U.S. Personal Income and Outlays: Personal spending increased 0.1%, incomes increased 0.2%, and the savings rate increased to 5.4% in February
- Case-Shiller Home Prices: January home prices were unchanged month-over-month and increased 5.7% year-over-year (NSA); +0.8% month-over-month (SA)
- U.S. Consumer Confidence: +2.2 to 96.2 in March
- U.S. Employment Report: Nonfarm payrolls increased 215,000 and the unemployment rate increased to 5.0% in March
- Eurozone Purchasing Manager Index: +0.4 to 51.6 in March
- ISM Manufacturing Index: +2.3 to 51.8 in March
What to Watch For
- Tuesday 4/5: ISM Non-Manufacturing Index
- Wednesday 4/6: FOMC Minutes
Statistics on the Current State of the Market – as of April 1, 2016
|S&P 500 Index||1.8%||0.6%||2.0%|
|Russell 1000 Index||1.9%||0.6%||1.8%|
|Russell 1000 Growth Index||2.4%||0.8%||1.6%|
|Russell 1000 Value Index||1.4%||0.4%||2.0%|
|Russell 2000 Index||3.6%||0.3%||-1.2%|
|MSCI World Index||1.1%||-0.5%||-0.7%|
|MSCI EAFE Index||-0.2%||-2.1%||-5.0%|
|MSCI Emerging Markets Index||1.7%||-1.3%||4.4%|
|STOXX Europe 600||1.1%||-1.7%||-4.3%|
|FTSE 100 Index||0.7%||-0.5%||-0.4%|
|CSI 300 Index||0.8%||0.1%||-13.6%|
|Cash & Fixed Income|
|Citigroup 2-Year Treasury Index||0.2%||-0.1%||0.8%|
|Citigroup 10-Year Treasury Index||0.9%||-0.1%||4.7%|
|Barclays Municipal Bond Index||0.5%||0.1%||1.7%|
|Barclays US Aggregate Index||0.6%||0.0%||3.0%|
|Barclays Global Aggregate Index||1.0%||-0.2%||5.7%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.1%||0.0%||2.5%|
|BofA Merrill Lynch U.S. High Yield Index||0.3%||-0.0%||3.2%|
|BofA Merrill Lynch Global High Yield Index||0.7%||-0.1%||3.8%|
|JP Morgan EMBI Global Diversified Index||0.8%||0.1%||5.2%|
|JP Morgan GBI-EM Global Diversified Index||2.9%||-0.4%||10.6%|
|U.S. Dollar per British Pounds||0.3%||-1.3%||-3.7%|
|U.S. Dollar per Euro||1.6%||-0.4%||4.4%|
|U.S. Dollar per Japanese Yen||0.2%||0.0%||7.0%|
|Real & Alternative Assets|
|Alerian MLP Index||0.6%||-2.7%||-6.8%|
|FTSE EPRA/NAREIT North America Index||3.4%||-0.2%||6.0%|
|FTSE EPRA/NAREIT Global Index||2.1%||-0.9%||4.1%|
|Bloomberg Commodity Index||-1.6%||-1.1%||-0.7%|
|Gold (NYM $/ozt) Continuous Future||0.2%||-1.0%||15.4%|
|Crude Oil (NYM $/bbl) Continuous Future||-6.8%||-4.0%||-0.7%|
Source: Factset, Neuberger Berman LLC.