March 2016
Bazooka Blast
US employment firm for March
ECB ramps up QE
Bavarian Banks sidestep negative rates by stockpiling cash
US Fed on hold while Yellen dampens rate increase expectations
The month of March came in like a Lion...and pretty much stayed that way. It was a strongly positive month for nearly all equity indexes worldwide, including U.S. stocks. Developed and Emerging International market averages both did well, rising +6.6% (EFA) and +13% (EEM) respectively. It should be noted though, that as strong as the gains were, they were pretty much recovering ground lost in the earlier declines of January and early February. Bonds also had positive results in March with U.S. bonds gaining close to 1% and Treasury Inflation Protected bonds (TIPS) returning 1.7%. Commodities showed a gain this month (a rare occasion in recent years) which has them close to flat for 2016 thus far. Gold was the only negative category for the month after having a very strong January and February; it remains the return leader so far this year.

For the first quarter of 2016, the net results masked the wild ups and downs within the quarter. Well known market maven Art Cashin of UBS appropriately describes this kind of market as " commuting by roller coaster. Lots of chills and spills, but you ended up pretty much where you started." The Dow Jones Industrial Average and the S&P 500 posted gains with a rise of +1.3% and +0.77%, respectively - both accomplished in the very last days of the quarter. The NASDAQ composite had its worst quarter since 2009, down -2.75%, and the SmallCap Russell 2000 also declined in the first quarter, down -1.92%. Developed International markets slipped in the quarter, down 2.7% on average (EFA), while Emerging Markets rose a strong +6.4% (EEM). Emerging Markets were in part propelled by a monster +27.18% gain in Brazil (EWZ). The Zika virus, floundering Olympics preparations and poor ticket sales, political scandals in the Presidential office with threats of impeachment - none of these could stop the Brazil market's rebound from the thorough pounding it took in 2015, when it lost -42%. Now that's a rollercoaster for sure!

In U.S. economic news on March 4th, the Labor Department reported the U.S. economy added +242,000 jobs last month, solidly beating expectations of +190,000.  The unemployment rate remained at 4.9%.  The strong jobs number, along with an upward revision to January's gain to 172,000, eased concerns of many that the financial market plunge in the beginning of the year might have had a serious effect on the overall economy.  The labor force participation rate rose +0.2 point to 62.9%, continuing its lift-off from multi-decade lows but still far below pre-recession levels.  One of the flies in the jobs ointment, however, was the continuing stagnation in manufacturing employment, while services provided the bulk of employment gains.
U.S. manufacturing remained in contraction according to the Institute of Supply Management (ISM) manufacturing index, which came in at 49.5 (below 50 is contraction).  However, this was an improvement over last month's reading of 48.2 and beat expectations by +1.5 points.  U.S. manufacturers have been hurt by a strong U.S. dollar and weak global demand.  On a positive note, while the headline number is still below the neutral 50 level, new orders and production both expanded at the fastest pace in 6 months.  
In Europe, the European Central Bank (ECB) was determined not to disappoint markets and announced a multi-faceted stimulus plan. On March 10, the ECB cut the overnight lending rate to zero from 0.5%, cut the interest rate on bank reserves stored at the central bank further into negative territory (from -0.3% to -0.4%), and increased by one third its monthly asset purchases (from $66 billion to $88 billion).  The ECB expanded its asset purchases to include investment-grade corporate bonds, as well as sovereign government debt.  Finally, the ECB announced it would originate long-term loans to European banks that will let them borrow for four years at rates between 0% and -0.4% (in effect paying banks to borrow as an incentive to increase lending).  Markets rallied as the full impact of this "bazooka blast" began to sink in. The ECB, in short, is aggressively moving to spur bank lending and revive their economy, using every tool in the kit:

The Germans, however, remain skeptical of this policy. In a little noticed story last month, the Bavarian Savings Banks Association (Bayerische Sparkassenverband) urged its 71 member banks to stockpile cash rather than send it to the ECB and earn a negative return of .40%. This movement to "hoard" cash is a natural reaction by savers to negative interest rates, but the ECB seems unable to grasp that this perfectly rational response to what is effectively a tax on savings might be the reason their economy is moribund. Eurozone unemployment, for example, was at 10.3% in January, the lowest in over 4 years, but more than twice that of the US.  Individually, Germany's was the lowest at 4.3%, France was at 10.2%, Italy at 10.5%, and Spain was at 20.5%.
Also little noticed by U.S. investors last month, in Asia, Moody's Investors Services cut China's government credit ratings to negative from stable, citing rising government debts, declining foreign reserves and doubts about authorities having the "capacity to implement reforms".  Perversely, China's Shanghai stock market index greeted the downgrade with a +4.3% rally. China's manufacturing PMI was just 49.0 last month, the worst since January of 2009. The Chinese government reported that a total of 1.8 million workers in China's coal and steel sectors are expected to lose their jobs as part of China's efforts to reduce industrial overcapacity. A worse-than-expected monthly trade report in March was the latest sign of China's struggling growth.  February exports plunged nearly -25% from a year ago, the biggest monthly drop in more than 6 years.  China's trade surplus narrowed sharply as imports also posted a double-digit drop. None of this will come as good news to the Bank of China, which has embarked on a policy of devaluing the yuan to revive their export-oriented economy.
On March 16, the U.S. Federal Reserve Open Market Committee met and decided to scale back its pace of interest rate increases by deciding to sit tight for now at the current .25%-.50% fed funds target rate. They also indicated that "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run".  The statement from the FOMC referenced "global economic and financial developments (which) continue to pose risks" as justification, even though their goal of full employment (5%) and moderate inflation (2%) have been realized.
Long time Fed watchers were startled that the Fed refused to act, or was scared to act, on its own data-dependent guidelines.  Chairman Yellen muddled her press conference afterwards, and about the only thing she sounded clear about was that the Fed isn't clear about the outlook. The takeaway is that the Fed caved in to global pressure and abandoned its hawkish tightening bias, losing more credibility in the process. Equity investors were relieved, however, and bid up prices in anticipation of this more globally coordinated central bank support.
Spring is always a great time to get outdoors and enjoy the return of warmer weather. In the same way that many of us are getting our gardens ready for planting, we are also tending to your portfolios with the same nurturing and care. The weather has gotten more hospitable, and we're back into growth mode this quarter. Thank you as always for your interest in our Journal, and we'll post the next installment early next month!



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