2016 Q2 Market Commnetary

The old adage says that “time in the market” is more important than “timing the market.” Anyone who needed a reminder of that truth got it in spades during the first quarter of 2016. Who would have thought, on the dark morning of February 12th, when the S&P 500 index was down more than 10% since the start of the year, that U.S. equities would finish the quarter up 0.8%?

Corporate earnings tend to drive stock prices to fair value over the long term, yet anything can happen in the short term. Perhaps this is why Benjamin Graham, considered the father of value investing, described the investment market as a rational “weighting machine” that considers the facts over the long term, but also as a fickle “voting machine” influenced by fads and fleeting popularity in the short term. Such psychological mood swings are exactly what we saw during this year’s first quarter. The mood swings are exacerbated by media driven headlines. When the Dow Jones Industrial Average (DJIA), an often quoted market index, falls by 100 points (about 0.60%) the headlines often read “Market Plunged 100 Points Today.” Similarly, when the DJIA rebounds 350 points (about 2.33%) headlines read “Market Finishes in Positive Territory.” Can you feel the difference? These may be exaggerated examples to prove a point, but if you listen to the media for any amount of time you will pick on the dramatization.

Much of the fear driving volatility during the quarter surrounded concerns over a slow down in China, further declines in commodity prices, and perceived weakness in the U.S. economy. Chinese weakness now seems to be priced in, as such we anticipate less market concern going forward. Commodity prices seem to have stabilized. No doubt, there will be high profile defaults in the energy and mining sectors, but these seem priced in as well. Finally, we believe the U.S. economy has operated at much stronger levels than many market watchers give it credit for, and will continue for the remainder of the year.

Strength in the labor market is one reason to be positive. In aggregate, the hiring of 8.1 million people over the past three years is equal to all U.S. job creation accomplished in the 14 years prior, according to a Blackrock analysis of job data following the March employment situation report.

Manufacturing may finally be shifting into a higher gear. The March ISM Manufacturing Index beat expectations by rising from 49.5 in February to 51.8 in March (any number above 50 indicates growth)[1]. This was the highest level since July 3rd. The ISM Manufacturing index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. It monitors employment, production inventories, new orders, and supplier deliveries.

The Fed, the United States’ central bank, is likely to remain cautious in its rate increase efforts. Janet Yellen’s, chair of the Federal Reserve Board, comments indicate that while she acknowledges improvements in the economy, she is also focusing on weaker international growth. The Fed is clearly in no hurry to raise rates again. We expect to see one raise this summer and perhaps one more late in the year.

First quarter real gross domestic product (GDP), a measure of economic health, is anticipated to be about 2.0%. The economy is enjoying a number of tailwinds, including low mortgage rates, healthy consumer income growth, and low energy prices. Weak growth overseas is a drag, however we don’t see it outweighing the positives here at home.

For these reasons, we feel good about the U.S. economy. The first quarter reminded us that economic growth alone is not capable of producing a consistently rising stock market. Short term fads and fleeting popularity can cause significant drops. It is important to remember that volatility is a normal part of investing. Following long quiet periods in the market, those without much volatility, any upheaval can seem scary, particularly when covered by an overzealous media. The key is to focus on the fundamentals and give them time to play out. Remember, it is about time in the market, not timing the market.

The views and opinions expressed are of White Horse Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. White Horse Advisors is an investment advisor firm located in Atlanta, GA

[1] Source: Institute of Supply Management