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The first week of 2016 marked the worst start to U.S. stock market trading in history. Heightened volatility — spurred by a myriad of global concerns, including a slowdown in the Chinese economy, a crash in oil prices and uncertainty surrounding central bank policies — unsettled equity markets well into February. With such a shaky start, few would have anticipated the strong rally that took place in the latter half of the quarter, bringing the first quarter results for global equities and fixed income into positive territory.
The S&P 500 Index, which is composed of U.S. large-company stocks, rose 1.4% in the first quarter. Value stocks (Russell 1000 Value TR: +1.6%) outperformed growth stocks (Russell 1000 Growth TR: +0.7%) and previously beaten-up sectors, such as materials and energy, participated in the recovery. The outperformance of value stocks was particularly strong among smaller capitalization stocks.
The dollar depreciated this quarter relative to both developed- and emerging-market currencies, which had a positive impact on returns for U.S. investors overseas. Emerging-markets stocks (MSCI EM GR) led the global stock recovery, logging in returns of +5.8% (in US$ terms). International-developed markets stocks began to recover in the last month of the quarter, but the rally wasn’t sufficient to erase the declines experienced earlier in the year. The MSCI EAFE Index declined by 3.0% in US$ terms.
On the fixed-income side, the Federal Reserve held off raising rates in the first quarter, citing global growth concerns. The U.S. yield curve flattened, with rates at the shorter end declining by less than rates at the longer end of the curve. The Barclays Aggregate Index of domestic investment-grade bonds (the U.S. bond market) was up by 3.0% for the quarter.
High-yield bonds (BofAML US HY C Pay BB-B Constd Index) gained 3.2% for the quarter.
As oil prices began to recover, investor fears regarding high-yield defaults in the energy sector were somewhat allayed, and the fear of default in other sectors of the high-yield market appeared to be overblown.
International fixed-income also performed well this quarter, buoyed by the weakness of the U.S. dollar. Unhedged developed-country bonds (Barclays Global Aggregate ex-U.S. Index – Unhedged) rose 8.3%, as the European and Japanese Central Banks continued with their expansionary monetary policies. Emerging-markets bonds (JPM GBI-EM Gl Div UH) gained the most (+11.0%) following a rough 2015.
The results of this quarter underscore the importance of a disciplined approach to investing. As we see time and again, markets tend to recover well before the news becomes upbeat. An undisciplined investor distraught by the market sell-off in January could have easily been spooked out of the market before the recovery began to take place and would have missed out on the positive returns the market served up at the end of this tumultuous quarter.