Highest Volatility in Years

These first four months of 2016 have been the most volatile since the onset of the dot-com blow up in 2000 with huge swings in both directions.  April continued the trend selling sharply early and at the end of the month sandwiched around a nice mid-month rally.  The net of the month and the year-to-date swings has been just a bit over 1% appreciation in the large-cap, S&P 500 and Dow Jones Industrial indices.   

The increased volatility has not been particularly surprising as the lethargic, global economic recovery is being counterbalanced by worldwide central banks keeping the monetary spigots wide open, though with seemingly less effect:

Uninspiring Economic “Growth” – Hopes for Second Half Recovery

• First quarter U.S. GDP growth barely positive at 0.5%.  Throughout the post-Great Recession period, the first quarters have been disappointingly weak, though in 2016 the weakness can’t be blamed on any weather-related issues.  The subsequent quarters have generally perked up but with still sub-3% annual growth rates and minimal inflation.  Again, expectations are for a moderate pick-up as the year goes on, hopefully again averting a recession.

• “Profits recession”.  While the economy has so far avoided a recession, corporate earnings have been declining for the past four quarters.  This is unusual in a non-economic recessionary period, but not unprecedented.  In fact, the other periods of non-recessionary, earnings declines have also generally coincided with sharply falling energy prices.  While falling revenues for the big energy companies pulls down aggregate earnings, the consumer gets the benefit of saving dollars at the pump which have then gotten somewhat funneled back into the economy, keeping it afloat.  This stimulus has seemed more subdued this time around, but perhaps has been enough to keep the economy chugging along.

Continued Central Bank Pump-Priming – Running Out of Bullets?

• Negative Interest Rate Policy (NIRP) Implemented in Europe and Japan.  Testing the interest rate policy limits, both the European Central Bank and the Bank of Japan, implemented negative official interest rates.  The idea is to actually penalize saving, thus incentivizing economic players to spend.  The results have been mixed at best as NIRP has severely impacted the business model viability of financial institutions, such as banks.  Paradoxically, the currencies of both Europe and Japan have strengthened despite academic expectations of weaker currencies in response to these experimental attempts at easing.  The net is that the U.S. dollar has finally been cheapening after quite a run higher.  The weaker dollar is expected to give our exporters a break and possibly our economy a bump.

• Federal Reserve Continues to Play It Cautiously.  The Fed followed their March meeting with an April meet that ended with no policy change (as expected) and a statement that continued to indicate their desire to raise rates two times this year.  I don’t want to sound too cynical, but I am a skeptic that the Fed will be able to do this with the anemic growth in our economy.  If I’d wagered against the Fed actually raising rates every time they indicated they were close, I think I could have made a great deal of money over the last five years or so.

• Weaker U.S. Dollar Providing an Economic (though not investment) Tailwind.  After shooting higher in 2014 and early 2015, the U.S. dollar has actually been consolidating at somewhat lower levels for the past year or so.  This has been counterintuitive as the diverging monetary policies of the world’s central banks were expected to spur a stronger dollar.  While the weaker dollar will likely help our exporters, it might make U.S. investments less attractive so we might finally see some follow through recovery to international investments.

The net of all these crosscurrents, combined with the fact that the bull market (for the S&P 500) is now the second longest in history has left many market participants on edge.  Will these economic challenges eventually overcome central banks’ monetary policy and end this bull market in U.S. stocks?  Nobody knows that answer with certainty today.  However, I am confident there will be other opportunities for diversified investors and those who are able to keep their wits about them and invest according to their plan.