Weaker global economic data continued into the new year and tested the nerves of more than a few investors. Global stocks (MSCI All Country World Stock Index) ended the month down 6.3%. The month’s winners were managed futures, up 3.3%; international bonds, up 2.0%; and TIPS, up 1.5%. Short term and intermediate-term bonds also posted modest gains at 0.2% and 1.2%, respectively.
- The initial estimate of fourth-quarter real GDP was 0.7%, close to the expected 0.8%. Absent an upward revision, real GDP for the year would be the slowest growth since 2012.
- Inflation (CPI) inched up slightly in January. The year-over-year inflation rate now stands at 0.7%, still well below the Fed’s target of 2.0%.
- Job gains in January were slower than expected at 151,000, but there was a surprising gain in manufacturing of 29,000. The unemployment rate fell to 4.9% - an eight year low.
- U.S. small cap stocks bore the brunt of the January selloff, declining 8.8%. U.S. large cap stocks (S&P 500) declined 5.0%.
- International stocks ended the month lower with international large cap down 7.2% and international small cap down 7.5%.
- Emerging markets lost 6.5% in January, continuing their slide. China’s economic woes continue to make headlines, causing more uncertainty and skepticism among investors.
- The 10-year U.S. Treasury yield fell to 1.9%, hovering near a one-year low.
- U.S. bond returns were positive as yields fell. Intermediate-term bonds gained 1.2% with most of the strength from the government sector.
- Managed futures gained 3.3% in January, primarily due to positions that captured the downward market trends.
- REITs lost 3.2% and commodities lost 1.7%, again hurt by falling oil prices.
Tough Start to 2016 The first trading day and the last trading day of January 2016 were starkly different. January 4th, a day on which the major U.S. indices lost between 1.5% and 2.0%, marked the beginning of a volatile market selloff. By contrast, January 29th saw the S&P 500 up 2.4% for the day. Speculation abounds in the media about the reasons for the tough start to the year and what lies ahead.
Rather than speculate about China’s slowdown, a high yield bust, or oil prices, we focus our attention on actual economic data that impacts the markets. Short-term volatility can be triggered by any number of things, including irrational and emotional investor sentiment. While the volatility can be disconcerting, we believe the U.S. economy is growing, albeit slowly. There will be some setbacks along the way, but the fundamentals indicate that the U.S. is on the right track.
Other countries and regions are bound to face both challenging and prosperous times, which is why we maintain globally diversified portfolios – not wagering on specific countries, industries, or companies. Attractive stock valuations, particularly outside of the U.S., and gradual rising U.S. interest rates should be a boost to long-term portfolio returns.
Equity performance has been disappointing so far; however, it’s too early to write off 2016 only one month in. 2016 could still turn out to be a better year than 2015, but only time will tell. Evidence suggests that maintaining a patient, long-term approach should provide the best results. In the meantime, here are some suggestions for weathering the volatility:
- Ignore scary (and misleading) headlines in the news
- Talk with your advisor
- Focus on what you CAN control
- Keep a long-term perspective
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com.