by Scott Smith, CFA

Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the First Quarter of 2016. The excerpt is posted here for the benefit of our blog subscribers.

2016 got off to a rough start as global equity markets plummeted amidst a variety of investor fears, ranging from a decelerating Chinese economy to plunging oil prices and fear of additional Fed rate hikes. US markets posted their worst starting week on record, dropping nearly 6% in the first five trading days of the year, and the worst January since the depths of the financial crisis in ‘09. It seemed clear that some investors were heading for the exits, thinking that the remarkable bull market run since 2009 had finally petered out.

But just when things looked most dire, markets abruptly reversed course. Central banks around the world signaled they would remain accommodative, while oil prices bounced off their lows as energy supply cutbacks began to take hold. US stocks roared back, climbing nearly 13% from February 11th to March 31st and putting first quarter returns for the S&P 500 index at a positive 1.4%. It was a remarkable recovery that few saw coming. The turnaround highlights both the difficulty of market timing and importance of sticking to one’s long-term investment plan, especially when the emotions of the moment might dictate otherwise.

Mid and small-cap US stocks (up 3.8% and 2.7%, respectively) bested the large-cap companies that comprise the major US stock indexes such as the S&P 500 and the Dow Jones Industrial Average. On the sector level, utilities (up 15.6%) and telecom (up 16.6%) led the charge as interest rates fell yet again, driving investors towards these higher dividend-yield sectors. At the opposite end of the spectrum, healthcare stocks (down 5.5%) were hurt by rumblings of legislation to reduce drug prices, while financials (down 5.1%) suffered from the drop in interest rates, which tends to reduce profit margins on lending.

Performance of international stock markets was mixed. Developed markets floundered, with the MSCI Europe index declining 2.4% and the MSCI Pacific index giving up 3.7%. Europe continues to struggle with slow economic growth that has heightened deflationary pressures. On a more positive note, emerging markets stocks rallied on the quarter in line with the rebound in commodity prices, with the MSCI Emerging Markets index finishing up 5.8% on the period. Brazil (up 28%) and Russia (up 16%) were among the biggest winners. The US dollar gave back some of its 2015 gains, dropping about 5% against the euro and 6% against the yen and providing a nice boost to international returns.

To continue reading, please see our entire Economic and Market Review (link will open in a new window).