ClearBridge Investment's Hersh Cohen comments on the first quarter of 2016 regarding rallying oil prices and investor caution approaching the election.
"A Quarter Full of Sound and Fury, Signifying Nothing?
Paraphrasing Shakespeare’s Macbeth, one has to wonder about the meaning of the first quarter of 2016. The actions in the securities markets were indeed furious, but did they signify anything significant? A brutal and swift 10% decline leading off the year was followed by a vigorous rally that brought the popular averages back to where they began the year, essentially unchanged.
As we had hoped in our year-end commentary, dividends, particularly rising ones, regained popularity in the very low interest rate environment. It was a good quarter for most of our sectors. In late December, we wrote with a high degree of conviction that we expected difficult and erratic markets would continue until oil prices stabilized. We interpreted the collapse of oil and other commodity prices as not just a matter of oversupply, but as a reflection of a marked slowdown in global economies and therefore, lack of adequate demand. We also felt that the minor rise in interest rates by the Fed, along with their misplaced confidence in the strength of the economic recovery in the U.S., was scaring the markets.
By mid-February, things had changed. Oil prices began to stabilize and then rally. Remarks from Fed officials became much more benign. As oil rose in price, so did hope that the recession in manufacturing was bottoming. Fears about banks and their energy industry loans subsided. Many stocks recovered from their lows.
Unfortunately, the sluggish economy we experienced in the years after the “Great Recession” of 2007-2009 has led to voter unease and an election year that is hard to watch. Candidates have taken discourse to the lowest possible levels. Being offered – besides name calling, smearing and juvenile comments – are simplistic solutions to very complex issues. Instead of ideas for growth, we get a blame game. The point is, we are uncertain about how financial markets will react as the election approaches, but we lean toward continued caution.
Regarding oil, it seems intuitive that lower energy prices would stimulate consumer spending and benefit companies that use a lot of petrochemicals and oil. However, as we discussed in our last commentary, the drastic decline in oil prices has hurt manufacturers and producers more than it has helped other parts of the economy. Consumers continue to behave cautiously, as modest personal income growth appears to be going to pay down debt incurred during the worst of the recession, or to increase savings. At some point, one would hope that the effects of low oil prices would reverse. That would be a huge boost to the economy." Download below to read full report.
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