Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Quarterly Market Overview: Q2 2016
Published Date : July 25, 2016
When the Federal Reserve ended its stimulative bond buying program, commonly known as “Quantitative Easing”, some investors questioned whether the U.S. economy would be able to support itself without additional stimulus. Since that time, the economy has continued to grow, albeit at a slow pace, and global equity markets have slogged through a volatile period where returns have been muted while bond yields have fallen to historic lows. This has been a frustrating environment for many investment managers and clients alike as intra-quarter market fluctuations have been significant and the end result has been very little return presented in the marketplace.
In our view, uncertainty is at the root of this market action and we believe it has been brought about by a long list of legitimate concerns including a financial crisis in Greece, an unprecedented decline in the price of oil, slowing growth in China, uneven growth within our own economy, extraordinary levels of central bank monetary stimulus and Britain’s exit from the European Union.
During the second quarter, however, markets experienced a bit of a reprieve as U.S. economic data improved, oil prices recovered from their lows and the U.S. Dollar depreciated. While domestic equity markets ultimately ended the quarter with a positive return, it was matched and, in some cases, exceeded by bonds as it appeared investors continued to look to the U.S. Treasury market for safety and yield. This appeared to be especially true during the final week of the quarter when Britain’s decision to exit the European Union was decided and Treasury yields fell to historic lows.
Our firm navigated the quarter by positioning portfolios conservatively in early April, after the equity market had appeared to recover from its first quarter swoon. At that time, we felt the risk/reward of the equity market had become unattractive and we moved to an underweight position while we increased exposure to cash and Treasury bonds. This was based on our view that valuation was not likely to move beyond its historical average and that earnings growth would continue to be muted by low oil prices and a strong U.S. Dollar. Our firm believes this positioning left us ready to take advantage of the brief market pullback in the aftermath of the Brexit decision.
In recent weeks, the economic outlook has become more favorable in our view and, as we look to 2017, we see signs that earnings growth may accelerate as oil supply finally begins to come down and prices stabilize. From our vantage point, this should lead to a more normalized environment with equity prices appreciating in line with earnings growth. Meanwhile, some asset classes, such as emerging market equity, have become significantly undervalued by our estimation and appear to be showing the potential to generate relative outperformance as GDP grows at an incrementally faster pace than that of the developed world.
If the current economic cycle continues to progress in line with our forecast, we will, as we have historically, look for opportunities to take advantage of volatility. It is times such as these when maintaining discipline and diversification are a key part of a successful investing outcome in our opinion. While we acknowledge that the U.S. is in the later stages of this economic cycle, the firm is proceeding cautiously and employing a balanced approach by investing in assets that we see as attractively valued relative to historical levels while maintaining ballast in order to offset volatility.
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