Fears of a global slowdown and new lows in crude oil prices triggered an 11% selloff in stocks during the first six weeks of 2016.
However, a stream of data showing that the six-year U.S. economic expansion was still intact put the bulls back in control during the last six weeks of the quarter.
It was a see-saw ride, but by the end of the three-month period, the Standard & Poor’s 500 stock index eked out a total return of 1.4%.
Last quarter, we mentioned that growth stocks had dramatically outperformed value-style stocks, not just for the quarter but for all of 2015, and we warned that the pendulum can swing from one extreme to another.
That is precisely what happened in the first quarter of 2016.
Value stocks beat growth within each of the market capitalization bands.
It was a total reversal from investor preferences in 2015.
Small- and mid-cap value stocks trounced the gains on the four other styles and market-cap categories.
For the 12 months ended March 31, 2016, the three S&P 500 sectors usually considered to be the most defensive - telecom, utilities, and consumer staples - were the leaders as the broad market went sideways.
This came as a big surprise to most Wall Street strategists.
According to research from independent economist Fritz Meyer, these three sectors have been among the most “panned” in both 2015 and 2016.
Wall Street so-called experts are often totally wrong in their tactical asset allocation advice.
This chart shows why broad diversification is important.
Can you imagine how an investor in stocks tied to oil and commodities was feeling seeing the heavy losses deepen in this 12-month period?
The crude oil index shown lost 41%. Master limited partnerships, which are tied to the fortunes of energy companies, lost 37.2%% and the commodities index we track quarterly lost 28.7%.
While the 1.8% total return in this 12-month period may seem paltry, and the returns of about 4% on indexes tracking real estate investment trusts, gold, and bonds may not look very spectacular, a prudently managed portfolio, diversified broadly among these 12 asset classes, would not have been crushed.
Leading economic indicators of the U.S. economy increased two-tenths of one percent in March. The LEIs had dropped one-tenth of one percent in January and again in February. So the March advance in this forward-looking index was welcome news. The leading indicators have drifted lower for months or gone sideways for years before rising again since June 1999.
What matters most, however, to a long-term investor is corporate profits.
Earnings ultimately is what drives stock prices.
In this chart, stock prices, the black line, are determined by the red line, corporate earnings.
Plotted in the upper right corner in the two red dots are the latest consensus 2016 and 2017 earnings forecasts by Wall Street analysts.
Barring some unexpected bad news - and bad news is bound to happen now and then - the black line will be pulled toward the red dots, which represent the consensus forecast of Wall Street analysts.
Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S survey of consensus estimates. Standard and Poor’s for index price data through April 7, 2016. Past performance is not a good indicator of your future results.