The First Shall Be Last

The first quarter of 2016 is now in the record books, and what a wild ride it has been for financial markets.

So now is a good time to recap the volatile first three months of 2016, sort out the winners from the losers, and see what it tells us about the health of the markets.

The year started off on a sour note for global stock markets, with the S&P 500 Index plunging 8% in just the first 10 trading days of 2016; that’s the worst start to any year over the long history of this blue-chip stock index dating back to 1928!

By mid-February, stocks were down 10.5%, a second significant stock market correction (a decline of 10% or more) in less than six months. But markets found their footing in February with the S&P 500 rallying 13.5% off the lows, to post a gain of 1.05% during the first quarter overall.

Other global markets did not enjoy such a dramatic reversal of fortune to the upside however. In fact, just take a look at European stocks and you see the exact opposite.

The Stoxx Europe 600 Index sank nearly 8% in local currency terms during the first quarter of 2016. That’s a dramatic reversal of fortune to the downside from 2015, when European stocks outperformed U.S. equities by the widest margin in 10 years. Now, they’ve fallen behind the S&P by the most since 2003!

Central bank stimulus plans are losing their magical properties when it comes to financial markets.

This performance disparity is all the more curious because the European Central Bank just rode to the “rescue” of financial markets once again by increasing monetary stimulus; driving interest rates lower in hopes of lifting asset prices. Yet confidence in the eurozone economy is at a 13-month low.

It’s clear that central bank stimulus is losing is magical properties when it comes to boosting financial markets.

After all, this experiment with sub-zero interest rates has never been tried before on such a grand scale. Beware of the unintended, and unknown, consequences. This should also serve as a cautionary tale for the ECB’s counterparts at the Federal Reserve as they gradually “normalize” U.S. monetary policy after nearly a decade of near-zero interest rates.

Not surprisingly, banks have been the biggest losers among European stocks so far this year, because profit margins are under intensifying pressure from negative interest rates. U.S. banks are suffering too, with the S&P 500 Financial Sector down 5% year to date, one of the worst performing domestic sectors.

This tells me that, in spite of the remarkable comeback for U.S. stocks this month, volatility could return at any time and with a vengeance. As my colleague Mike Larson points out, it’s difficult to imagine stocks taking off to the upside; not with the market being led by defensive sectors like utility and telecom stocks, while pro-cyclical financial and technology stocks lag.

That’s not the sign of a healthy stock market poised to zoom higher, but I’d like to hear your opinion too. Which stock market sectors are you invested in right now, or what are you avoiding? And what sectors do you think offer the best upside potential for the second quarter and beyond? Please let me know your thoughts in the comment section below.

Good investing,

Mike Burnick

McDonald’s Corp. (MCD) plans to open 1,500 new restaurants in China, South Korea and Hong Kong, seeking faster-growing markets to help push its global turnaround. The fast-food company said it is looking for partners to help finance the growth. The company said it will give local managers more decision-making power to respond to Asian customers. McDonald’s is revamping under CEO Steve Easterbrook, after saying earlier that it had failed to keep up with changing tastes. McDonald’s has 2,800 restaurants in China, South Korea and Hong Kong, most owned by the company as opposed to being franchise units.

Five members of the U.S. women’s soccer team filed a federal complaint against the U.S. Soccer Federation, alleging wage discrimination. The players cited USSF figures that show they were paid nearly four times less than men’s players, despite generating more revenue. The team members — co-captains Carli Lloyd and Becky Sauerbrunn, forward Alex Morgan, midfielder Megan Rapinoe and goalkeeper Hope Solo — filed their complaint with the Equal Employment Opportunity Commission. The U.S. women have been successful on the field, at the turnstiles and with television ratings. Its 5-2 win over Japan in last year’s World Cup final was the second-most-watched soccer match in U.S. television history, attracting more than 25 million viewers.

Standard & Poor’s Ratings Services cut the outlook for the Chinese government’s credit rating, the second major ratings firm in the past month to raise concerns about that country’s creditworthiness. S&P kept its Double-A-minus rating on China’s sovereign debt, but lowered the outlook to negative from stable.  The move comes as China opens its massive bond market wider to foreign investors.  S&P said the China’s efforts to revamp the world’s second-largest economy toward domestic-led economic growth is proceeding “more slowly than we had expected.” Moody’s Investors Service this month also lowered its outlook on China’s debt to negative.

Tesla Motors (TLSA) will unveil its Model 3 electric car tonight at its Los Angeles design studio. At a starting price of $35,000, the Model 3 is less than half the cost of Tesla’s previous models. It is expected to have a range of at least 200 miles when fully charged, double that of competitors in its price range, such as the Nissan Leaf and BMW i3. Tesla said potential buyers could start putting down $1,000 deposits today for the model and it plans to put it on sale near the end of next year.

Investigation Discovery television channel is re-examining the O.J. Simpson case in a program called “Hard Evidence: O.J. Is Innocent,” according to the Hollywood Reporter. The executive producer will be famed actor Martin Sheen. The six-part true-crime docuseries will re-examine the murders of Nicole Brown Simpson and Ron Goldman, with an entirely new viewpoint: That Simpson did not commit the grisly homicides nearly 20 years ago. Sheen will also narrate the series. The program is reportedly planned to air in early 2017.

The Money and Markets team

Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.