GAINING MOMENTUM?

Around the globe, March was a politically volatile month: the US is in the midst of a particularly nasty primary season, China continues to reform its economy, Europe struggled with terrorist attacks, and the Syrian crisis continues. In spite of all those troubles, the markets found some momentum and investors seemed to relax.

In its March meeting, the Federal Reserve (Fed) decided to not raise rates. This forced the Fed to set aside its tentative plan to raise interest rates four times during this year and, instead, it cut its forecast to just two rate increases. After the rocky start to the year, this came as no surprise to investors. Since that meeting, several members of the Fed clarified that those two rate increases could start as soon as April, if US economic data looks healthy.

In contrast to the Fed’s hopes for another rate hike, the European Central Bank (ECB) announced an expansion of its economic stimulus program. Negative interest rates featured prominently in this new package of stimulus measures. The ECB president, Mario Draghi, offered a very frank discussion of the ECB’s intentions for these measures and gave guidance on the future of the stimulus program. He warned that the ECB is prepared to hold rates low, or negative, for “an extended period” and suggested that further rate cuts could come, if necessary. However, he acknowledged that low interest rates hurt banks and that the ECB would hesitate to wound the banking sector too deeply in the pursuit of economic growth.

Generally, the markets responded positively to this news. In fact, investors were so optimistic about Europe that they hardly blinked when Brussels was the victim of a pair of terrorist attacks, they largely ignored the clamor from Britain about potentially leaving the European economic union, and they did not seem too worried about the refugees overwhelming Greece. For much of the past two years, European stocks have been trading at bargain prices, and it appears that investors are unwilling to sell at even deeper discounts.

Meanwhile, China continued to implement a steady stream of reform measures to rebuild investor confidence at home and to allay the regulatory concerns of foreign investors. The most significant announcement was that the People’s Bank of China (PBoC) would open the Chinese bond market to foreign investors. As the third-largest bond market in the world behind the US and Japan, it is larger than the rest of the emerging bond markets combined. Obviously, there will be an adjustment period for market participants—currently, many bond issuers publish very little information in English—but expect institutional investors to start blazing a path soon.

The announcement from the PBoC was timed well. Emerging markets started to find their footing in March. As commodity prices stabilized, the resource-rich emerging markets recovered strongly. Oil crept above $40 per barrel in March and closed the month just below that mark. Brazil is one of the oil-dependent nations that is benefitting from the improvements in the global commodities markets. Of course, commodity prices have not been the only stumbling blocks to the Brazilian economy. The ongoing corruption investigation—which reaches to the President’s office—is also worrying investors. It is telling that Brazilian stocks perform best on those days when the President receives bad news or it looks like the investigation is likely to end in her impeachment. Currently, the Brazilian government is trying to hold itself—and the Brazilian economy—together until after this summer’s Olympics.

Market Movers

Investors cheered up in March and finally showed a willingness to take risk in their portfolios. That increased appetite for risk benefitted our portfolios, as both US and Foreign Stocks performed strongly for the month and pushed back into positive territory for the year. Similar to last year’s market pullback, the pullback in January was followed by a quick rebound. All of the Core Allocation portfolios have provided attractive returns relative to global stocks and Morningstar’s World Allocation mutual fund category, both year-to-date and over the last year. Bonds and diversifying assets have started to outperform US stocks which has not been the case over the last five years. These types of trends change which reinforces the reason why the Core Allocation portfolios do not allocate too heavily in any single asset.