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While You Were Sleeping...

The sky is falling! The sky is falling! Remember? It was only two months ago, in January, when markets opened the year down nearly 11%. Gas prices reached a multi-year low and recession fears abounded on virtually every financial news network. In fact, if it hadn't been for the incessant coverage of Presidential primaries and the 20+ debates on both sides of the aisle, we may have had an all-out panic on our hands. But guess what? Now, with just three days left in the first quarter of 2016, we have virtually climbed out of the hole the year started in and may, just may, end the quarter with small gains in US markets.


Given the current geopolitical and economic climate, it seems somewhat surprising that the Dow and S&P 500 are on the verge of completing their largest single-quarter comeback since 1933. In many ways, this change of fortunes points to the increasingly complex nature of the global economy. Sure, the rally in market returns was helped by the parallel rally of oil prices (which actually climbed above $40 per barrel briefly, after falling below $30 per barrel), but that certainly does not account for five consecutive weeks of market growth after a nearly record-breaking loss to start the year.


One reason that the market seems to have been able to hold its gains over the past few weeks is the action, or actually inaction, of the Federal Reserve. After raising interest rates in the fourth quarter of 2015, the Fed stayed put on interest rates during its most recent adjustment opportunity. While this was expected, especially given the market volatility of the past three months, the real news was Chairwoman Janet Yellen's reduction in expected increases for 2016 to two, down from four. This becomes important since interest rate hikes tend to correlate directly to increased inflation. Two interest rate increases for 2016 is much more palatable to Wall Street, making this news the equivalent of cement between the bricks of our financial house.


Equally as important is the relative rally in European and Japanese markets. Since mid-February, the Nikkei industrial average (Japan) is up 13% while the MSCI EAFE (developed international markets in Europe, Australia and the Far East) are up 8% during the same time frame. Even China, which has been the cause of much economic unrest here in the United States, is up 8% during that time. Given the amount of U.S. debt owned by China, the Fed's decision to keep interest rates level (as mentioned above) is a positive for the Asian markets.


These results become a real positive for the US investment markets because of the interwoven nature of the global economy. Sure, we have been describing the US markets as "the nicest house on a bad block," and while that is still true, it doesn't hurt the nicest house when the others also get somewhat better. Keep in mind that while the S&P 500 has erased nearly all of its early year losses (as of 3/24), Japan is still down 10%, while Europe is down approximately 5% and China a hefty 16% during the same time frame.


So what have we learned? Not to beat a dead horse, but we have learned that patience is the key. The only people who suffered during these past few months are those who decided to sell their investments. Sure, they may have missed a week or two of the bad times. But they also, undoubtedly, missed some of the gains. No matter how hard you try, you will NEVER sell at the top and NEVER buy at the bottom. There are plenty of reasons to buy and sell different investments, but two-month returns are never one of them.


On the flip side, the people who gained the most over these past six weeks are those who took idle cash and put it to work. As you will recall from my March Commentary, the environment was akin to a grocery store with all of your favorite foods on sale. While it wasn't a tremendously good time for swapping one investment for another, it was a great time to buy new investments.


Today, as we begin to look towards spring and summer, the grocery store is much closer to "back to normal." We maintain our outlook for 2016, an election year like many others...flat and likely to be decided within small numbers on either side of zero. That does not mean there aren't still opportunities for gains in the market place, nor does it mean that any boat has been missed. Like everything else, however, investments are made with a disciplined, purposeful approach that seeks the most out of long-term gains. Remember, it is a marathon, not a sprint.





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