Mayhem in the Markets
We had a wild and turbulent start to the year. The S&P 500 fell 10% in the first three weeks alone. It was the worst ever start to a year on record. Late January, the market rallied a little only to drop 7% in the first two weeks of February. By February 11, the market had sunk 14% for 2016.
It seemed like we were in a freefall. Economic concerns were swirling and there was mayhem in the markets. The Fed was signaling higher interest rates in spite of the cracks showing in the economy. Investors were frightened and confused. Oil prices slumped to $26 per barrel in late January down from $50 a year earlier. At the same time, the Chinese market was facing turbulence over their economic slowdown. Speculation raged over this potential impact. Together, these factors were roiling the markets.
The sharp decline harkened at past dark times for investors. Bear markets of 2000-02 and 2008-09, the S&P500 fell over 50%. Today’s economic conditions are not as dire as those periods, but we never know how low the market can fall once it gains momentum on the downside.
Fortunately, February 11 proved to be the low point and a turnaround began. One catalyst for the rebound was crude oil which has now recovered to over $40. China fears have also subsided and this further eased the concerns.
The lynchpin for the market recovery in the quarter came from unanimous dovish statements from the world’s major central banks. Japan, China, Europe, and our Fed essentially re-committed to easy money policies in order to stabilize markets. This reassured investors. At this point, people concluded the efforts by central banks would provide a suitable platform for the economy to improve in the months ahead. The mayhem ended and the market recovery began.
The Floor Rises
In the ascent from the February low, a standout characteristic was that last year’s worst performers in the market became the best performers this year. Beleaguered companies in hard hit industries staged remarkable turnarounds.
Examples of these “floor of the market” companies are energy, emerging markets, and materials based companies, like steel. These groups have been in two year bear markets. Since the market low in February, value investors rushed in to bid up these shares under the premise that these companies would face improving prospects and these valuation levels were better than areas that had held up reasonably well.
Adding support to this thinking is the recovery potential of depressed industries exceeds the growth forecast for the overall economy. Most economic forecasts for the economy are for muted growth. If this holds true, the broad market won’t do nearly as well as the stocks that are in rebound mode after being in a bear market for the past two years.
These examples include energy, materials, and emerging markets. They are attractive because of low valuations on a relative basis. Many in these categories are still down over 50% from their all-time highs.
During the quarter, Peregrine clients made strong profits on the ETF from Brazil, several energy stocks, and Nucor Steel. These are examples of investing in “The Floor” of the market. They were severely stretched to the downside when the investment was made in the first quarter and they paid off handsomely.
Obviously, more of these profitable outcomes will be needed for 2016 to be a strong year.
Pursuing this effort, we invested in the emerging markets ETF to capitalize on a recovery in these markets. We invested in gas transmission companies at the beginning of the year and these have been paying off. They are attractively valued relative to their historic levels. They also pay high dividends.
Bond markets still offer attractive opportunities to earn over 4% on both domestic and international corporate bonds. These asset classes also suffered over the past year but are now recovering nicely.
Central banks are making a concerted effort to devalue their currencies. This policy is bullish for gold. We clients hold investments in this sector.
Some stocks look exceptionally intriguing. Facebook was sold for profit taking in March but is probably worth re-buying when circumstances dictate. Earnings and sales growth for this company have been extraordinary. First Solar is a leading solar panel maker that is highly profitable. Acuity Brands is showing rapid growth and is making inroads in providing energy efficient lighting for commercial and high end residential markets. All of these companies have standout growth characteristics and are fine candidates for client investment portfolios.
Our Equity and Balanced Composites finished up 1.90% for the first quarter. It will be important to maintain the momentum off the February low in the second quarter.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.