U.S. Gross Domestic Product, which measures the overall output of goods and services produced in the economy, rose at an overall rate of 1.4% in the fourth quarter of 2015, putting full‐year 2015 growth at 2.4%. While the headline GDP data for 2015 continued a trend of modest growth, the underpinnings of the economy have diverged.
Consumer spending, which accounts for over two‐thirds of U.S. economic activity, continues to propel the economy forward. The U.S. consumer is benefitting from a better employment picture, a stronger housing market, and lower energy prices. Employers in the U.S. have continued to add jobs at a healthy pace, and the unemployment rate for the first two months of 2016 registered at 4.9%, the first readings below 5.0% since early 2008. March job creation remained robust, however the unemployment rate ticked up to 5.0% due to more people entering the labor force. Housing prices continue to rise, while low energy prices remain a tailwind for consumers.
Despite the relatively solid footing of the consumer, cyclicallyexposed corporations are facing headwinds. As we head into first quarter earnings reports, corporate profits have fallen for two straight quarters. The primary culprits of the weak profit picture are low oil prices for energy dependent firms as well as a strong dollar, which acts as a headwind for U.S. multinational companies. Weakness in the energy sector was a prominent theme in 2015, and prices remain low. WTI crude oil began 2016 trading just below $40 per barrel, and after briefly falling under $30 in February, closed the quarter slightly higher than it began the year, trading just over $38 per barrel.
International economies continue to cloud the U.S. economic outlook. A lack of growth plagues developed foreign markets, with Europe’s central bank in a continuing state of quantitative easing, while the Bank of Japan is experimenting with negative interest rates. China’s trend of decelerating growth continues, as the nation most recently reported 6.9% growth in 2015, with the International Monetary Fund projecting growth for the next two years to fall closer to 6%. Other emerging economies are facing more dire situations given the low commodity price environment and weak local currencies.
Looking forward, continued strength in consumer spending will likely be needed to show positive economic growth, while any rebound on the industrial side of the economy would be welcome news. Early readings on the first quarter of 2016 are mixed however, with consumer spending showing signs of slower growth as personal savings rates have moved higher. More encouragingly, manufacturing increased in March for the first time in seven months, helping push the ISM manufacturing index back above 50, which generally indicates expansion. Economic data will continue to be closely watched by the markets as we move further into the year, as will developments on the political front as this unusual primary season draws to a close prior to the upcoming presidential election.
After seven years of holding short‐term interest rates near zero percent, the Fed moved to increase the benchmark rate by a quarter of a percent in December of 2015. Following the first rate increase in nearly a decade, the market has been speculating on the timing and magnitude of any future rate hikes. Despite the Fed’s initial guidance of up to four additional hikes throughout the current year, the modest growth experienced so far in 2016 makes it more likely that any further rate increases will be conducted at a more measured pace.
Consistent with the aforementioned backdrop, the Fed did not raise rates at its January or March meetings. Recent comments from Fed officials indicate that any increase is also unlikely in April, pushing speculation out to the June FOMC meeting as to when the next rate hike may occur. Economic growth domestically and abroad will be watched, as will signs of any upticks in inflation.
Yields on U.S. Treasury securities of various maturities fell sharply during the quarter. The 10‐year Treasury dipped below a 1.7% yield in early February due to a flight to quality coupled with plummeting global bond yields, before ending the quarter 50 basis points lower than it started. Five‐year and two‐year treasury notes also saw their yields end the quarter markedly lower, while the yield on the three‐month T‐bills inched higher with along with expectations for the Fed Funds rate.
Lower bond yields of course mean gains for fixed income investors. Government, corporate, and even high‐yield bonds posted gains during the first quarter, with the Barclays Capital US Aggregate Index posting a 3% gain for the quarter. Over the past year, bond investors have earned more modest returns, and high‐yield investors have seen losses, largely due to energy exposure within that market.
Treasury yields of selected maturities for recent time periods are displayed below.
|Treasury Bill||Treasury Notes & Bonds|
|3 mo.||2 yr.||5 yr.||10 yr.||30 yr.|
The total return numbers for various fixed income indices over the last twelve months are displayed below (data from Bloomberg).
|52 Week Returns (a of 3/31/16)|
|Barclay Capital US Aggregate||1.96%||Merrill Lunch US High-Yield||-3.99%|
|Merrill Lynch US Treasury Int-Term||2.22%||Merrill Lynch US Municipal Index||4.12%|
|Dow Jones Corporate||2.23%||JP Morgan Embi Global||4.36%|
Major US stock market averages began 2016 on a sour note, with the Dow, S&P 500, and NASDAQ all dropping by 5% to 8% during January. However, the markets were largely unchanged during February before rebounding sharply in March, allowing markets to move slightly positive for the quarter with the S&P 500 closing just 3% below its all‐time high. The dramatic mood swing of the market can also be illustrated by the nearly 14% gain from the intra‐quarter low of 1810 the S&P 500 reached in early February to the quarter close.
The first quarter of 2016 did see some signs of a shift in leadership as growth stocks, which were by far the best performing style in 2015, lagged their value counterparts. Similarly, emerging market indices rebounded with a gain in the quarter, after lagging badly in 2015. Smaller‐capitalization stocks continued to lag behind the S&P 500, and foreign stocks located in developed countries were weaker during the first quarter.
With most equity markets little changed for the quarter, valuation continues to be slightly above average, but not at extreme levels for broad market averages. Reported earnings have declined over the past two quarters, primarily due to weakness in commodity prices, a stronger dollar, and a soft global economy.
Below is a table which displays various equity index returns for the past quarter.
|Equity Indices||4th Qtr. 2015|
|Dow Jones Industrial||2.20%|
|S&P 500 Growth||0.53%|
|S&P 500 Value||2.20%|
|Russell 2000 (small-cap)||-1.53%|
|MSCI/EAFE (developed international)||-2.86%|
|MSCI/EM (emerging markets)||5.69%|
Looking at sector performance within the S&P 500, there was once again a wide dispersion of returns. Telecom and Utilities, two smaller sectors of the market known for defensive characteristics and higher dividend yields, far outpaced the overall market return. Conversely, Financials and Health Care posted negative returns, as financial companies struggle with the challenging interest rate environment and the health care sector faces uncertainties with respect to the political landscape. Also of note were Energy and Materials stocks, which posted positive returns after a difficult 2015, as there were early signs of stabilization of commodity prices.
The following table details S&P 500 sector returns for the quarter (price only).
|Return by Stock Sector||4th Qtr. 2015|
|3. Consumer Staples||4.85%|
|7. Information Technology||2.17%|
|8. Consumer Discretionary||1.20%|
|10. Health Care||-5.93%|