There is a common saying that time heals almost everything. Yet, even as we embark on the fifth year since the pandemic began, most of
Cloudy with a Side of Volatility
Published Date : January 31, 2016
It has been almost seven years since the world’s economy and markets reached their global financial crisis lows. Since then, domestic stock and bond markets have recovered strongly but the economic cycle has been slow to progress, and the pace of growth has been disappointing relative to previous economic recoveries. In this lower-for-longer growth environment, the economy has experienced periods of inconsistency several times. Last year was no exception as GDP growth fluctuated significantly from one quarter to the next with fourth quarter growth likely falling below 1%. Despite the discouraging end to the year, we do not feel this is the beginning of a broader slow down.
Last year, inconsistent growth and an uncertain global economic outlook resulted in heightened market volatility and most of our diversified portfolios ended the year with a slightly negative return. You know it’s a tough year when generationally low-yielding bonds, which benefited from delayed action by the Federal Reserve and lower than expected growth and inflationary pressures, led the global market place with a slight positive return. And the S&P 500 led the global equity market once again with a loss of about 1%, before dividends. Meanwhile, smaller stocks, international developed market stocks, emerging market stocks and commodities finished broadly lower.
Given the market outcome so far this year, it may appear as though returns are destined to be lackluster once again. While we’ve had a rough start to the New Year, and we expect volatility to continue, we think it is premature to conclude portfolio returns will be unsatisfactory. While it is true that worldwide growth has moderated on the backs of a slowdown in China, sluggish corporate earnings growth and the first part of a new Fed rate cycle, consensus views now reflect worst case scenarios, and the recent market action largely echoes this. While we acknowledge several economic pressures exist, a broader, long lasting slow-down is unlikely as there are several bright spots in the U.S. economy including the overall health of the consumer and employment market. Additionally, many of the earnings headwinds have the potential to dissipate if oil prices and the U.S. dollar stabilize. Internationally, Europe’s economy is continuing to recover in response to European Central Bank stimulus and China’s issues are largely self-inflicted policy mistakes. The end result is likely to be another year of moderate GDP growth with market returns more closely reflecting earnings growth.
Economic circumstances change, but rarely at the pace recent market volatility suggests. Following several years of low volatility and steadily rising stock prices, finding bargains over the last several years has been difficult. Temporary corrections, such as the one we experienced last summer, provide opportunities for long term investors to buy high quality securities at attractive prices. Additionally, the importance of maintaining an allocation to bonds is reinforced given the safe haven they provide in volatile times such as we have witnessed recently.
While each year presents its own set of challenges, we expect many of 2015’s frustrations to subside over time and for economic growth to continue at a moderate pace. With the valuation of the market now below historical averages and the growth outlook continuing to be favorable, we expect this economic pause to be a short-lived bump in the road towards a continuing economic recovery.
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