U.S. Stocks
2016 was a horrible start for stocks. By early February, stock indexes had already posted losses of up to 12%. Needless to say market doubters had plenty to say. The media took advantage of the drop to remind us how bad it was in 2008 and many investors were paralyzed with fear. Here at HDWS we welcomed the opportunity and did our best to challenge the consensus. The end of the quarter had a much different tone than the start. Major stock indexes recovered all of their losses for the year and the DOW Jones Industrial Average finished just 3% away from an all-time high. Investors who stayed calm were rewarded and those who were able to take advantage of the pull back should be pleased. It remains to be seen how the ever present interest rate environment and the presidential election will effect returns going forward, however the first quarter of 2016 proved once again that the US stock market while not impressive, is resilient.
International Stocks
If US stocks are resilient, then European stocks have been downright obstinate. The European Central Bank (ECB) has pulled every lever, reducing rates and in some cases money is almost free. The annual yield for German 10 year bond has seen lows of .10%. With all that cheap cash, you’d think the economy and stock markets would respond. However, Europe continues to face the real challenge of fear as the Paris and Brussels attacks remind us that there are real issues that need to be dealt with. European stocks finished the quarter down about 1% which is a testament to investor’s economic fortitude. European stocks have faced issues like Russia, Greece, Spain, Portugal, immigration problems, and terrorism yet remain steadfast.
Bonds
In December of 2015, the Federal Reserve (Fed) announced that it was going to increase the key interest rate by .25%. What was widely expected to be the beginning of an across the board increase in interest rates actually turned out to be the beginning of a drop in interest rates. If you’re confused, you are not alone. Way back in the summer of 2014, we wrote an article (it’s still on our website) explaining how the European Central Bank reducing European interest rates will keep US rates low as well. That is exactly what happened. At the beginning of the year the yield on the US 10 year Treasury was 2.22%. By March 31, that yield had dropped to 1.78% a reduction of almost 20%. The reason for this drop is simple: demand. European yields dropped to almost nothing, the German 10 year bond was yielding as low as .10%. So, global investors looking for the best deal, bought the US Treasury which was yielding almost 18 times more. As more investors bought treasury bonds, prices were driven higher. Since interest rates move in the opposite direction of prices, we are now testing the all time low rates…again. For all the talk and conjecture, rates are exactly where they were in the spring of 2013, before the end of the historic bond buying program, before the “taper tantrum” and before the Fed raised rates.
— Market returns and interest rate figures from Bloomberg.
