1st Quarter 2016 Market Commentary

If I simply told you that US Large Cap stocks were up 1.35% and bonds were up 3.03% in the first quarter of 2016, I’d be leaving out a large part of the story. In between January 1 and March 31, stocks declined as much as 10% in early February, only to reclaim the entire loss and post a small positive return by quarter end. That’s a rocky ride, even compared to historical market moves. International developed stocks fared worse, the MSCI EAFE Index was down -3.01% for the quarter. Emerging market stocks finally shined, with the index up 5.71%. Commodities posted a slight positive return, up 0.42%. Global REITS had strong performance, up 7.22% in the first quarter of the year.

While Americans watched our new favorite reality show “The 2016 Presidential Election,” there were several fascinating and important stories developing for investors around the world.

Negative Interest Rates in Japan

On January 29, the Bank of Japan (BOJ) announced a negative interest rate policy. The Japanese equivalent of the Fed Funds rate is now -0.1%.[1] This negative policy rate is effectively a penalty on banks that do not lend aggressively since banks have to pay interest on excess reserves. The BOJ is now the second major central bank to adopt a negative interest rate policy. The European Central Bank (ECB) has been negative since mid 2014. Other countries with negative policy rates include Switzerland, Sweden and Denmark.

The BOJ’s announcement was a shock to market participants, sending Japanese stocks higher and the Yen lower against the US Dollar. Previously, Bank Governor Haruhiko Kuroda stated that Japan would not adopt negative interest rates. Currently 60% of global government bonds are paying less than 1%, with almost 30% paying less than zero. [2] It remains to be seen whether these extreme and unconventional central bank policies will have a positive or negative effect on their home economies.

“Brexit” Fears

The U.K.’s pound sterling fell to a seven- year low versus the U.S. dollar in late February after Prime Minister David Cameron made good on a promise to let voters decide whether or not the country will stay in the European Union (EU).[3] This is the first time the pound has dropped below $1.40 since 2009. The last sustained valuation below $1.40 was in the mid-1980’s. A U.K exit from the EU, coined a “Brexit”, would have dramatic implications for U.K. exports, the pound, Bank of England policy, and economic collaboration amongst European economies. U.K. voters will have their say in a referendum vote on June 23. Prime Minister David Cameron supports remaining in the EU while members of his cabinet and London’s Mayor Boris Johnson favor a Brexit.[4] It is also likely that Scotland will exit the U.K. if voters choose to exit the EU. Get ready for fireworks leading up to the June 23 vote. 

Economic Woes in Brazil

Brazil is dealing with an economic recession, claims of bribery and fraud inside its state-run oil company, and a potential impeachment of President Dilma Rousseff. This is all in anticipation of the 2016 summer Olympics in Rio de Janiero in August. The IMF estimates that Brazil’s economy shrank -3.8% in 2015 and projects it to fall an additional -3.5% in 2016.[5] Similarly, Brazil’s unemployment rate rose from 6.7% in mid 2014 to 9.5% by the end of 2015.[6] Brazilian stocks have rallied 28% in 2016, but this follows a 65% drop between mid 2014 and the end of 2015. A parliamentary committee will decide whether or not to proceed with an impeachment trial for President Rousseff by the end of April. She is accused of hiding increases in the county’s budget deficit in 2015 by using loans from state-owned banks.

Future of the US Economy – Tech and Energy

There are always concerning headlines and events happening around the world. Perhaps they are amplified by instant connectivity and the 24-hour cycle of news prevalent today. Despite the vitriol coming from the Presidential election, there are many reasons to be excited about the future, especially for the U.S. economy. Two areas of particular interest are technology and U.S. energy production.

Technology companies in the U.S. are global leaders in innovation. Google and others are fine-tuning self-driving cars which have the potential to dramatically alter our everyday lives. Imagine what productive activities could replace the hours Americans spend driving each year. Virtual reality is now a reality with the release of Facebook owned Oculus Rift in late March. While the initial uses may be gaming and social activities, architects, auto dealers, and even militaries are considering potential uses for this technology. The implications for machine learning will increase efficiencies in all areas of the economy. From healthcare to manufacturing, the future of technology is very exciting. U.S. companies are leading the way.

Despite a continued slump in energy prices, the long-term outlook for U.S. energy production is bright. Technological advances in horizontal drilling and fracturing have unlocked huge reserves of crude oil and natural gas. The U.S. ended its 40-year export ban of crude oil in the budget passed in December 2015. Recently, the first liquefied natural gas (LNG) export left Cheniere Energy’s facility in Sabine Pass in southwest Louisiana, headed for Brazil.[7] While this first LNG export tanker is mostly symbolic, it represents an enormous potential for the U.S. to become a major supplier of natural gas to Europe. During the current downturn, U.S. energy producers have found ways to further cut the cost of production, mostly through technological advances. Americans working in the oil and gas industry deserve tremendous credit for their efforts over the past decade. Throughout this painful downturn, they have continued to lower the cost of production with ingenuity and technological advancement. As this cycle turns, U.S. energy production is something to be excited about going forward. 

Political polarization is higher than it has been since the turn of the 20th century. Our government was designed to handle this type of discourse. Warren Buffett famously said, “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” As for disciplined investors, you know the deal – keep your head down and stick to the plan. Investors are rewarded for patience and discipline. There will always be another crisis.


Blair DuQuesnay, CFA, CFP®

April 2016




[1] Nakamichi, Fujikawa, and Warnock; “Bank of Japan Introduces Negative Interest Rates,” Wall Street Journal, January 29, 2016; http://www.wsj.com/articles/bank-of-japan-introduces-negative-interest-rates-1454040311.

[2] David Kelly, JPMorgan Guide to the Markets 2Q 2016 call on April 5, 2016.

[3] Stubbington, Tommy; “British Pounds Sinks to Seven-Year Low on “Brexit” Fears,” Wall Street Journal, February 24, 2016; http://www.wsj.com/articles/british-pound-sinks-to-seven-year-low-on-brexit-fears-1456311828.

[4] Gross, Jenny; “London Mayor Boris Johnson Backs Exit From EU, Dealing Blow to Cameron,” Wall Street Journal, February 22, 2016; http://www.wsj.com/articles/boris-johnson-favors-british-exit-from-european-union-1456077759.

[5] International Monetary Fund, “World Economic Update,” January 29, 2016; http://www.imf.org/external/pubs/ft/weo/2016/update/01/pdf/0116.pdf.

[6] Samuelson, Robert; “Brazil’s Nightmare: No End in Sight,” The Washington Post, April 10, 2016; https://www.washingtonpost.com/opinions/brazils-nightmare-no-end-in-sight/2016/04/10/59fcde88-fda8-11e5-9140-e61d062438bb_story.html.

[7] Cohen, Bonner; “U.S. Natural Gas Exports Begin,” April 11, 2016; http://news.heartland.org/newspaper-article/2016/04/11/us-natural-gas-exports-begin.