With the first quarter of the year just completed, the stock market as measured by the S&P 500, an index of 500 large companies, was up about 1%. The NASDAQ index, with a strong emphasis on tech stocks was down over 2%, while most indexes of smaller stocks were generally positive. International markets were mixed with developed markets generally negative, while emerging markets turned positive.
The bond market did well during the quarter, as longer term interest rates fell. The 10-year Treasury, which started the year yielding just over 2.25% finished the quarter with a yield of under 1.8%. Investors with intermediate term bonds would have achieved total returns, income plus price appreciation, of around 3 to 4% for the quarter.
Investors with a diversified portfolio of stocks and bonds will generally have achieved slightly positive returns for the quarter. People who had the balance of their money in money market or savings accounts still earned close to zero for the first three months.
If investors were not closely looking at the market during the first quarter, the results would tend to imply that not much happened. However, there was a significant amount of volatility, as stocks were down over 10% earlier in the year, and managed to recoup all of the losses.
Those investors who tend to watch the market closely and panicked, when prices were down, would have missed the recovery in the stock market. Of course, when prices dropped earlier in the quarter, there was no way to have known that the market would have regained its losses quickly. However, these latest price moves help to reinforce the point that it is vey difficult to successfully time the market.
Interestingly we had similar price action last year. The stock market started 2015 down, and quickly recovered its early losses. Later in the year there was a steeper decline, and a subsequent recovery with prices for the year ending virtually unchanged.
Looking at the economy we see little change thus far this year versus 2015. Job growth for most of last year was average, close to 200,000 per month, and that has continued in 2016. The latest employment report for March showed a solid increase of 215,000 jobs.
Decent job growth would normally be a good sign for the economy. However, economic growth remains quite sluggish, averaging just about 2% per year. This rate of change will probably not be too much different this year versus 2015.
Fairly sluggish economic growth is a consequence of changes in productivity, which have been rather stagnant in recent years. The lack of productivity increases explains in part why wage growth has been fairly weak. However, the current low unemployment rate would tend to lead to an increase in wages, as the supply of additional workers diminishes.
What tends to drive stock prices in the short run is the amount of risk investors perceive. Earlier in the year, when there was a greater perception that international events might lead to a recession in the U.S., stock prices fell. As that perception started to change, and risk levels retreated stocks then began to recover.
Because a large percentage of U.S. corporate profits are dependent upon foreign markets, various international events will impact stock prices. For now the global economy, as is the case with the U.S., will likely be fairly similar in 2016 versus last year. This would imply that we have a stock market that bounces around, but may not change significantly, unless there is a material change in the world economy.
Looing forward the strong performance we saw in the bond market in the first quarter is unlikely to be repeated, as it would be highly unlikely to see another significant drop in longer term interest rates. For stocks, while the current profit outlook is mixed, it will eventually improve, which will result in better performance over time.
The first quarter of this year should have signified to investors the importance of having a long-term plan and sticking to it. There will always be uncertainty about the stock market, but over time long-term investors are highly likely to do better with a balanced portfolio then being very conservative and having most of one’s money in a savings account.
