The beginning of 2016 was plagued by concerns that the bull market was coming to an end and that the U.S. might be heading toward a recession. Connected with this were concerns surrounding: the U.S. labor market, economic growth in China, continuing volatility in oil prices, and a rising U.S. dollar. As a result, equity markets responded negatively in January and February. In March, central banks responded to investors’ geopolitical concerns. The Federal Reserve Bank (Fed) lowered its median projected expectation of further rate hikes in 2016. Instead of four rate hikes as originally projected, the dot plot now suggests two. In an effort to increase inflation, the European Central Bank (ECB) instituted a significant monetary easing package. Under this new monetary policy, qualifying banks are permitted to borrow money at negative interest rates. Essentially, the ECB will be paying banks to lend money to the broader economy.
For the quarter ended March 31, 2016, domestic equities had outperformed global equities as measured by the S&P 500 (+1.4%) and MSCI ACWI ex U.S. (-0.3%) respectively. Fixed income assets had a strong quarter. Notably, global government bonds ended the quarter up, over 7% as measured by the Citi WGBI. Elsewhere in fixed income, returns were strong for emerging market sovereign debt, global high-yield, U.S. bonds, and TIPS. Infrastructure assets ended the quarter down (-5.7%) as measured by the Alerian MLP Infrastructure Index. REITs continued their strong performance from 2015 as demand continued to outweigh supply in many major hubs.
Volatility is likely to remain both persistent and elevated as we move into the second quarter of 2016. This is highlighted by little stability in correlations between stocks and bonds. While risk remained high, our measures of Risk Concentration declined slightly towards the end of March. Given the uncertainty and instability in the markets, we will continue to favor fixed income exposure over riskier assets. Within fixed income, we favor U.S. short-duration debt over intermediate and long-duration debt. We still see heightened levels of long-term interest rate risk and expect increased downside correlations amongst equities, REITs, and commodities.