Investment Insights: Excerpts from our February report
The following are excerpts from the February “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.Global economics: Time to run away or towards?
The word “recession” has started to be regularly utilized in news outlets, both in print and on major media stations. As a result, general worry has crept into the psyche of investors, investment managers, and most everyone across the board. The market appears to be pricing in both good news and bad news regarding this concern. While the worry is most certainly real, there is equal reason to be both optimistic and positive on the markets for 2016. First and foremost, the re-pricing of risk and valuations has been needed for quite some time. Secondly, equities, as measured by the S&P 500 Index, now look to be a bit underpriced with a forward price-earnings (P/E) ratio just under the 25-year average of 19.9.
Expectations still point to continued global growth. The International Monetary Fund (IMF) Chief Christine Lagarde has warned of disappointing global growth in 2016; however, the organization still projects the world economy to grow by 3.6% in 2016 as outlined in its October 2015 forecast.Fixed income: Commodities impact expectations
Credit risk has re-entered the market materially for the first time since the financial crisis. This risk, coupled with the expectation of a more restrictive Fed, contributed to the whipsawing of interest rates throughout 2015 and into this year. High yield spreads have widened due in part to the commodity collapse that began in 2014 and continues into 2016.
There is continued concern in the bond markets that the Fed might increase short-term interest rates another two to four times this year, which would further flatten the yield curve.Equities: Consumer + crude = continuation
The present sell-off feels very much like the 11% decline in the S&P 500 that took place in August 2015. This time, however, the pullback has been much less steep, as the August correction occurred in only seven trading days. Aside from the size of the drop, both were precipitated by data out of China and further exacerbated by a sell-off in oil. For January, the S&P 500 was down 4.96% while international stocks saw a 6.85% decline, as measured by the MSCI All Country World Ex-U.S. Index. Emerging market equities were down 6.49%, as measured by the MSCI Emerging Markets Index.
What is also similar to August 2015 is that we view the recent market action as a correction and not the start of a protracted bear market. Most importantly, we certainly do not anticipate a redux of 2008.
Reading between the headlines, the reality is that the market looks to be repricing for future growth expectations. While investors are understandably nervous, washing out unrealistic expectations now helps reduce the risk of a greater setback down the road. The bottom line is that corrections occur multiple times during a protracted bull market and this period of consolidation is really only the second we’ve experienced in a number of years.
Click here to read more of the “Investment Insights” report from February 2016.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation does not ensure a profit or guarantee against loss.