Commentary on the Market: 1st Quarter 2016

Ruben’s Commentary on the Market

First Quarter 2016 Update

The first quarter of 2016 has been a roller coaster ride for the equity markets with a big drop in the averages early on. Although an attention getter, this resembled the first quarter of the previous three years. We saw significant drops in the early stages of the quarter with recoveries occurring later in the year. However, this year has been a bit different. 2016 began with a near 10% drop in the Dow Jones Industrial Average like we saw in previous years, only to end the first quarter up 2.1%. This is a departure from the slow recoveries seen in prior years.

Why was there a sharp drop and why did we have such a strong rebound? There is not a single answer, but a combination of factors that played a role in the big market drop and in the sharp rebound. I wrote in my January update the perceived bad news regarding the Chinese economy and plummeting oil prices were playing a big role in the market drop. Additionally, the strengthening dollar, the specter of the Federal Reserve Bank raising interest rates and the anticipation of poor fourth quarter of 2015 earnings reports would produce a significant slowdown in the U.S. economy. The rebound began when reality came into play. Things were not as bad as speculators and opportunists were making them out to be. At 6.9% GDP, China is still one of the most rapidly growing economies in the world. Oil rebounded up to the $40 range. The dollar began to moderate its rise, allowing our foreign trading partners to reevaluate their buying of U.S. goods and services. Fourth Quarter 2015 earnings were better than expected and the Fed indicated that it would follow a watch and see policy regarding U.S. economic growth before considering a more aggressive rate increase timeline. The unemployment rate continued to drop and most importantly, the U.S. consumer continued to spend. This robust consumer spending contributed to positive earnings surprises by many companies and helped the economy nudge forward.

What do we see going forward in 2016? We should continue to see moderate growth in the economy. The original estimate on GDP growth in the fourth quarter of 2015 was an annualized rate of 1%. The actual number came in at 1.4%. It is anticipated that we will continue to see modest movement upward in GDP growth during 2016. The unemployment rate continues to drop despite more people coming into the job market. March payroll reports showed an increase of 215,000 jobs. This makes 66 months of positive job growth. The total number of people in the job force increased by 2.2 million people in 2015. Wages were up 2.3% in 2015 and the current estimate for 2016 is a wage growth rate of 2.7%. This wage growth is anticipated to expand consumer spending by an annualized 2.4%. We are currently at a 5% unemployment rate with jobs being added at a strong pace year over year. This should continue at a modest pace until we get closer to the 4% unemployment rate, which is widely considered full employment. Although we are not close to that number, we will then see more wage growth as employers compete for qualified employees. In a nutshell, the consumer is currently driving the economy. This will balance out in the future as global industrial production expands from current levels and plays a more significant role in overall growth

As always, we are happy to address any questions that you may have. We will continue to provide you quarterly updates and timely reports on subjects that we feel will be of interest to you.