Markets began
the year with a swoon followed by a rapid recovery. After falling as much as 10.5% in
mid-February, the S&P 500 Index turned and actually ended the quarter up
nearly 1%. Across domestic and
international stock markets, emerging market stocks performed best in the first
quarter with a 5.7% return, reversing their last place finish within this group
in 2015. Inflation hedges also performed
extremely well in the first quarter after poor results last year: gold was up
about 16%, and gold miner shares were up more than 40%, while royalty trusts,
master limited partnerships, managed futures, and commodity funds generally
produced small positive results as well.
Bond markets were positive, and REITs were strong with a 5.8% return for
the quarter. Market indexes in balanced,
diversified portfolios produced modestly positive returns that are a little
less than we would expect in the long term, but our managed portfolios
generally outperformed balanced benchmarks for the quarter by meaningful
amounts.
In the first
quarter, the global economy grew at an anemic pace, and central banks stayed
accommodative. Broad diversification
generally helped, and given elevated volatility, rebalancing was particularly
helpful. The domestic stock market’s
drop in the first six weeks of the quarter represented only the second market
correction in the past four years. Our
portfolios generally held up far better than their benchmarks in this sharp
downturn, reinforcing our conviction that our broad diversification across
asset classes and our emphasis on dividends, financial strength, and reasonable
valuations for our stocks lead to a significant reduction in risk. Furthermore, preserving capital in weak markets
provides a big leg up when markets rebound, as they did in the last six weeks
of the quarter.
With a turn
up in market sentiment, and with our active management adding value, one may be
tempted to signal “all clear” and declare the market’s troubles behind us. We would love for that to be the case, but we
remain cautious. An unsettled political
environment, weaker than desired economic growth, declining earnings, the Fed’s
declared intent of raising interest rates, and most of all, elevated market valuations
combine to leave us cautious and interested in broadening diversification.
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