Close Menu

Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.

Investment e.Perspective

Current Issue | May 15, 2019

First Quarter Market Review – A Bear in the Air

By: Robert Schaefer, CFA, CFP®, Director, Investment Research & Oxford Investment Fellow

What was that we just saw? Did the "stealth" bear of 2015 finally come out of hiding or was it all just a bad dream? You can forgive investors for being more than a little confused after a "now-you-see-it, now-you-don't" first quarter that left professionals and novices alike scratching their heads.

Equity markets stumbled out of the gate in 2016, getting off to the worst start in Wall Street's long history. By February 11, the S&P 500 was already down 11% for the year and several other indices had experienced even larger declines. Investor worries were numerous:

  • China was heading for a hard landing.
  • The commodities bust would upend credit markets and banks.
  • Corporate earnings were weakening.
  • Central banks were running out of monetary stimulus options.

Then suddenly, as if drenched in pepper spray, the bear retreated. Data out of China suggested that Beijing had stemmed the tidal wave of capital fleeing the country, stabilizing (for now) its wobbly currency. Commodities started to rebound too – finally – on a weakening US dollar and rumors of production cuts. Additionally, the Japanese and European central banks reached back into their monetary medicine cabinets, while the Fed telegraphed a more "dovish" approach to rate normalization. At the margin, the outlook was improving. The rally was on.

By the end of the quarter, the large-cap S&P 500 Index (+1.3%) was back in positive territory, while small cap stocks (-1.5%) and international developed equities (-3.0%) had dramatically narrowed their losses. The most ferocious rebound was reserved for investments sensitive to commodities prices and dollar strength, namely, emerging markets (+5.7%) and natural resource stocks (+9.3%). To no surprise, bonds (+3.0%) benefited from the market turmoil and a more cautious Fed. All-in-all, seldom has such a "flat-ish" quarter looked so good.

Bear Essentials
An experienced hiker knows what to do when encountering a bear in the wild. Don't run. Make lots of noise. If the bear attacks, fight back. A well-placed punch to the snout or a jab in the eye may be enough to send your enemy into retreat. That is, of course, if we're talking about a common North American black bear. A grizzly bear, on the other hand, is a beast of a different sort. For a grizzly, running or fighting is futile. Your best bet – at least according to experts – is to play dead and let the brute claw, bite and toss you around until it gets bored (or full). Should you survive, count your blessings and count your limbs.

As bear attacks go, the latest market bloodshed appears to be the work of a black bear. Though painful, the cuts were never life threatening and the healing process is already well underway. The fact is, the fall in large cap US stocks (S&P 500) didn't even meet Wall Street's technical definition of a bear market (a 20% decline), having sunk just 13.85% at their low on February 11. The subsequent rebound has been swift and impressive, with the market surging 12.95% over the remainder of the quarter. Other equity categories, however, have experienced deeper declines, as evidenced by the 43.23% slide in emerging market stocks from 9/3/14 to 1/21/16. These wounds will take longer to heal.

Time for a Medivac?
When a hiker is injured in a remote location, authorities may call for a helicopter rescue. While only used as a last resort, a "medivac" can be the difference between life and death for the seriously wounded.

Global central bankers are reportedly thinking about a helicopter rescue of a different sort, should economic and market conditions call for it (think grizzly attack). Having already tried ZIRP (zero interest rate policies), QE (quantitative easing) and now NIRP (negative interest rate policies), it is clear that all means of monetary life-support are on the table – no matter how radical. Indeed, Mario Draghi, the head of the European Central Bank, sounded surprisingly open to so-called "helicopter money" during a recent interview. Several notable industry figures, including former Fed Chairman Ben Bernanke (nicknamed "Helicopter Ben” for a speech he gave on the subject in 2002), have also recently weighed in on its potential benefits.

What is helicopter money? Essentially, it means printing money to distribute to households or to fund government spending. Unlike quantitative easing, which represents a temporary expansion of the money supply (in theory at least), helicopter money would be permanent and direct. Can't afford a new car? No problem; here's a check. Not enough money to build that wall along the Mexican border? We'll just print more of the green stuff.

It sounds outlandish. It sounds inconceivable. It could happen one day.

Into the Woods
As investors, it is easy to tell that markets remain anything but "normal". Risks are elevated and it is difficult to see beyond the next tree. But like all good hikers, there are things we can do to improve our odds of a successful journey:

  • First, assess your physical and psychological condition. What is your investment horizon? What are your goals? Do you have the same tolerance for risk that you once did? Maybe that mountain you summited when you were 30 is no longer achievable or desirable at 60.
  • Second, don't skimp on the size of your pack. Load up your portfolio with a widely diversified mix of growth, safety and alternative investments. Much like a heavy hiker's pack, a portfolio full of diversifying investments will occasionally slow down the pace of your investment journey, but the additional fortification is invaluable in times of need.
  • Next, don't run from a bear. If there is anything the first quarter should have taught us, it's that markets can and will reverse direction without warning. An investor that abandoned stocks early in the quarter would have missed out on the sharp rebound that soon followed. Hold your ground.
  • Finally, stay focused on your destination. Investing should be about achieving long-term goals, not arbitrary short-term targets. Even the best planning can't insure your journey will always be smooth. Hikers know there will be rainy days. That's okay; the rewards are worth the effort.

The above commentary represent the opinions of the authors as of 4.18.16 and are subject to change at any time due to market or economic conditions or other factors.