2016
Q1 – Review
Q2 – Preview
What a way to begin 2016…
Looking back on Q1, it was quite a ride beginning in January with the worst annual market beginning
in history followed by a roller coaster recovery to close mixed with the S&P500 and Dow Jones
Industrials both positive and the NASDAQ negative for the quarter.
2016 Q1 Market Values (1/4/2016-3/31/2016):
Begin
End
Q1 LOW
NASDAQ:
4897.65
4869.85
4209.76 (-14.05%)
S&P 500:
2038.20
2059.74
1810.10 (-11.19%)
Dow
17405.48
17685.09
15450.56 (-11.23%)
Q1 Net Gain
0.6% loss
1.1% gain
1.6% gain
The S&P 500 Index chart below is provided only to illustrate this volatility.
Melbourne Office:
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2016
Q1 – Review
Q2 – Preview
So why are the markets so volatile?
Three Reasons:
1. Federal Reserve believes the 0% or near 0% FED Fund Rate (FFR) needs to be increased for
long term monetary policy stability. With the FFR so low, the FED has exhausted their power
to stimulate the economy. The challenge would be a recession and a FED with no capability to
stimulate the economy by lowering interest rates. Other FED challenges to consider is the US
dollar $ (USD) strength relative to other world currencies. The USD has been gaining on the
EU Euro € and Chinese Yuan ¥ which causes the prices of imported products to increase,
hence creating the potential for rising inflation. I believe the FED would like to see a bit of
inflation in prices to help justify their desire to increase the FFR, however, higher prices could
cause consumer discretionary spending to decrease resulting in a slowing of the economy,
which is a major concern for stock markets and the FED.
Melbourne Office:
2955 Pineda Plaza Way Suite 104
Melbourne, FL 32940
(P) 321-259-6239
(P) 877-571-7526
www.leonardfinancialgroup.com
Vero Beach Office:
601 21st Street, Third Floor
Vero Beach, FL 32960
2016
Q1 – Review
Q2 – Preview
2. Diminishing corporate earnings growth. Q4 2015 earnings continued a down trend of
decreased corporate earnings growth. When corporate earnings decrease, the impact to
stock prices is immediate usually resulting in a decrease in the price. More significant is the
market’s understanding of why corporate earnings are decreasing. Markets want to
understand secular trends, consumer trends, product lifecycles and a multitude of other
factors when trying to project growth or retraction. If a sector like energy is experiencing a
glut of oil which puts pressure on pricing due to oversupply, then what is the longevity of this
impact with respect to earnings? If the decline is prolonged, then the entire sector will suffer
as investors leave the sector. A review of the following chart shows why the markets are
fearful of diminishing returns with many of the major sectors all reporting lower than expected
earnings forecast for Q1 2016.
Melbourne Office:
2955 Pineda Plaza Way Suite 104
Melbourne, FL 32940
(P) 321-259-6239
(P) 877-571-7526
www.leonardfinancialgroup.com
Vero Beach Office:
601 21st Street, Third Floor
Vero Beach, FL 32960
2016
Q1 – Review
Q2 – Preview
3. Slowing GDP growth. In the 1950-60’s the average was above 4%, 1970-80’s the average
dropped to about 3% and for the past 10 years the average is below 2%. As GDP slows, the
markets heightened concerns stems from the fear of recession. As you can see from the
chart below, the GDP began to slow in 2006 prior to the market crashing in 2007-09. So,
when GDP begins to slow or turn negative, this is a good indicator of potential market
retraction.
Melbourne Office:
2955 Pineda Plaza Way Suite 104
Melbourne, FL 32940
(P) 321-259-6239
(P) 877-571-7526
www.leonardfinancialgroup.com
Vero Beach Office:
601 21st Street, Third Floor
Vero Beach, FL 32960
2016
Q1 – Review
Q2 – Preview
Q2-Preview. As we move forward into the next quarter, I expect the fear of another FFR increase to
re-emerge as we near June. Much of what happens with the FED will depend on the US economy’s
continued growth, albeit at a slower pace. If the GDP were to maintain the current 1-1 ½% growth
rate or better, then I would expect the FED to raise the FFR in June. However, if the GDP continues to
decline or go negative, then I would expect the FED to hold off on raising the FFR in hopes of keeping
the markets stabile. The FED’s action will not guarantee the stability of the markets, except to allay
the fear of interest rate increases and a tightening credit market.
Currently, our investment strategy continues to be defensive. Over the past 6 months, we have
reduced the market risk within the portfolio and looked for value in large cap equities paying higher
dividends (BP, VZ, T to name a few). In an effort to grow the portfolio, we will take a tactical growth
approach where there is an opportunity to buy into a stock or sector that is fundamentally sound but
is a good value buy based on historical technical values.
Please let us know if you have any questions regarding this newsletter or any other questions.
Best Regards,
Jeffrey M. Leonard, Managing Principal
Investment Advisor Representative
Melbourne Office:
2955 Pineda Plaza Way Suite 104
Melbourne, FL 32940
(P) 321-259-6239
(P) 877-571-7526
www.leonardfinancialgroup.com
Vero Beach Office:
601 21st Street, Third Floor
Vero Beach, FL 32960