The Seatbelt Sign Has Been Illuminated

First Quarter 2016 Perspective Economic and Investment Outlook

03.28.2016 - Ronald Sanchez

The volatility that shook the global equity markets during the first quarter of 2016 reinforced our view that we have reached a turning point, transitioning into a period of lukewarm market returns punctuated by semi-frequent bouts of turbulence.

Based on our observations, the US economy and the global equity markets are likely to continue trudging along—generating returns that will be disappointing compared to the market’s recovery in 2009 through 2014, but a far cry from the losses experienced during the 2008 financial crisis.

One way of looking at this market environment is to think about the sharp ups and downs of an airplane that has reached cruising altitude and suddenly hits a pocket of rough air, which the pilot decides to ride out.

As the air clears out and the plane stabilizes, passengers are still traveling at 30,000 feet, roughly the same altitude as they were travelling before the turbulence—shaken, but unharmed (CHART 1).

In the same manner, we expect the average global equity investor to emerge from this period of unsteadiness approximately where they started, accepting low-single-digit returns the way an airplane passenger might accept a complimentary cocktail from an apologetic flight attendant.

Exactly how long investors will endure this turbulence, bouncing up and down as they await clearer skies, depends on a variety of economic and geopolitical influences. But we do not expect to measure this stretch of unsettled air in days or months. In fact, indications of rough air ahead were already apparent in mid-2015.

The seatbelt sign will remain illuminated for a while.

Investor Sentiment Sways the Market

The behavior of the global equity markets during the first quarter of 2016 also made it perfectly clear, in our view, that investors are skittish. As a result, reactions to disappointing economic news and lower-than-expected earnings reports tend to be exaggerated.

This heightened level of investor anxiety manifested itself in several market disruptions early in the year. While we recognize that those selloffs were influenced by a decline in oil prices and disappointing economic numbers from China, we also see evidence that stocks were simply caught in the downdraft. The fundamental quality of those businesses didn’t suddenly deteriorate, but investor sentiment did.

In fact, investors turned so bearish so quickly in early 2016 that some speculated a global recession might emerge by year end.

No Emergency Landing

Recession Is Not on the Radar
While we also remain cautious about the US economy and are convinced that the investing landscape will remain challenging, we see signs of encouragement on the horizon. The economies of the US and many other developed markets appear to be on fairly solid footing, despite a soft patch in late 2015 as businesses worked through excess inventories.

In the US, a long stretch of job creation is underway (CHART 2), jobless claims are hovering near a 40-year low, and wage growth has started to accelerate. Buoyed by these improvements in the labor market, personal consumption rose at its fastest pace in a decade in 2015, while energy costs remained subdued (CHART 3).

Many of the fundamentals that were favorable through 2014 remain supportive today. They include modest global growth, low levels of inflation and accommodative global monetary policies that are keeping a lid on interest rates.

However, it is important to remember that supportive conditions are not favorable conditions. While we expect the US economy to grow modestly in 2016 and do not foresee a global recession, conditions aren’t strong enough to produce robust economic growth or strong equity market performance.

In our view, markets are likely to bounce along within a fairly narrow range of low single-digit returns.

Cruising Altitude: The Journey to 30,000 Feet

How did the US stock market reach this plateau?

In the years following the 2008 financial crisis, the Federal Reserve implemented its quantitative easing strategy, gradually reducing interest rates in an attempt to encourage corporations to borrow more capital, expand their operations and hire more workers—thus providing the economy with a much-needed shot of adrenaline.

Instead of using that capital to expand production however, many companies took advantage of low interest rates to borrow, buy back their own stocks and boost dividend payments. While those maneuvers gave the economy a modest lift, they were especially beneficial to company stocks, making them more attractive to investors and driving up valuations.

But accommodative monetary policy can only go so far for so long. Seven years into the Fed’s quantitative easing policy, the law of diminishing returns has kicked in. The stimulants that were fueling the growth of the US equity market have run out of steam and interest rates remain anchored near zero.

Against this backdrop, we anticipate domestic GDP growth will fall near the range of 2% to 3% in 2016, with global stock market returns settling into the same general neighborhood.

Finding Smoother Air: Our Approach to Turbulence

In simple terms, our goal in this new environment is to help investors not only endure a bumpy ride but also look for silver linings. Our long-term investing discipline emphasizes:

  • Balance. Our portfolio managers balance the growth potential of equities with the capital preservation qualities of fixed income and, where appropriate, alternative investments.
  • Selectivity. We are avoiding companies with meaningful exposure to China, the commodities markets and foreign exchange sensitivity in favor of high-quality companies that we believe have strong fundamentals.
  • Vision. On long trips, it’s inevitable that there will be some bumps along the way. But we would remind investors that following the flight plan remains critically important.
This approach has served our clients well in recent months, and we are confident it will continue to benefit investors during this period of turbulence and the years that follow.



This communication is intended solely to provide general information. The information and opinions stated are as of March 1, 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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