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Market Commentary 03/31/2016

Happy Birthday Bull Market!

It happened without much fanfare – no party, no balloons, no cake, but the bull market that started March 9, 2009 turned seven years old this past quarter. The bull will remain alive until we see a 20% drop from the previous peak, but that doesn’t mean this bull isn’t showing its age. By February 11th, the S&P 500 had a year-to-date loss of 10.5% and a peak to trough decline of 15%. This made for a rocky start to the year that left few celebrating.

The current seven-year stretch is about two years longer than the average bull market and the third longest in US market history. Over the past seven years, the S&P 500 has gained 204% with its greatest advances coming in year one, bouncing up 68.6% off of the March 2009 bottom. Many weary investors missed the early years of the bull after throwing in the towel long before the rebound.  In the same way but on a much smaller scale, the steep drop in January and February of this year, along with the heightened volatility, tried investors’ endurance.  A double digit decline before the end of February turned investor sentiment to levels of fear usually seen at major lows.  Few investors foresaw the turnaround that would erase those losses.   Nevertheless, by the end of March, the S&P 500 had staged one of the largest quarterly reversals since the Great Depression.

With the exception of healthcare and financial stocks, all sectors of the S&P 500 were positive for the quarter. Utilities and telecom stocks were the stellar performers driving up 15.6% and 16.6% respectively. Overall US stocks turned a double digit loss into a 1.3% gain for the first quarter.  Where value stocks lagged most of last year, they held an edge over growth stocks for the first quarter that was consistent across small, mid and large companies. REITs turned in another solid performance with a 5.8% return for the quarter, but the biggest surprise was the strength that came out of the emerging markets.  After three years of annual losses, the emerging market barometer, the MSCI Emerging Markets Index, gained nearly 6% for the quarter.  This growth has been attributed to investors scooping up bargains as commodity prices improved and the dollar slid. Developed overseas markets did not perform as well.  Europe continues to muddle through a sluggish economy, yet reasonable valuations and a very accommodative central bank are starting to have a positive impact.

The US economy officially entered ‘recovery’ seven years ago, and investors have expected to enjoy robust economic growth during this time. Unfortunately, as Janet Yellen and her predecessor Ben Bernanke have commented, growth has been frustratingly slow. In fact, the rate of recovery across this bull market has been more glacial than any since the 1930s. US stock prices have moved at a faster pace than the underlying earnings, making valuations for the broad market relatively expensive. The torpid recovery also brings out the naysayers in full force. Charles Schwab’s chief investment guru Liz Ann Sonders recently wrote about this lingering doubt in a piece titled, “Recession: Your Time is Gonna Come…But Not Yet”. She points out that economic expansions, like bull markets, don’t die of old age.  They die of excess.  We haven’t seen excess in the usual suspects such as growth, inflation or monetary policy.  If there is one benefit to sluggish expansion, it’s that excesses haven’t formed.  Even US market valuations, while not cheap, are far from being excessively rich.

So where does the aging bull go from here? Can it make another new high and avoid a 20% top-to-bottom decline by the end of May, surpassing the second longest-running bull, which ended back in August 1956?  The market often reminds us that we won’t know in advance.  There will be bumps ahead and we continue to prepare for them but “time in” the market versus “timing” the market will reward the patient investor. As always, we use diversification as a tool to reduce the bumps along the way. Staying the course is hard, but we hope that our help will make it easier for you.  We look forward to guiding you through these times.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager                                                            Asset Manager
JP Morgan 2Q 2016 Guide to the Markets; Charles Schwab & Co “Recession: Your Time is Gonna Come…But Not Yet” April 11, 2016; Schwab Market Perspective, “What a Quarter, What’s Next” April 1, 2016; Neuberger Berman “Market to Investors: It’s ‘Time In’, Not ‘Timing’” April 4, 2016; Money.cnn.com “America’s 7 Year bull Market: Can It Last?”, March 9, 2016; USAToday.com “Aging Bull Celebrates 7th Birthday: How Much Longer Can It Last?” March 9, 2016

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