The early part of 2016 was dominated by concerns over the Chinese economy and global deflation. Oil prices were falling and putting pressure on global credit markets and the banking system causing concern over the health and stability of the global economy. During the last few months sentiment has shifted, we have seen energy prices rebound and the concerns which dominated the headlines throughout the beginning of the year have faded into the background.
The global economy appears to be moving in a positive direction, but there is still a large amount of uncertainty domestically. We are well into the second quarter of 2016, and between the Feds June rate decision, soft corporate earnings, and the upcoming election, uncertainty remains high. As evidenced by the first half of this year, uncertainty creates volatility, range-bound trading, and a willingness on the part of the average investor to react to the news of the day.
In the FOMC’s most recent meeting, Janet Yellen backed away from the hawkish tone of her previous statement, leaving investors unsure about whether or not to expect another incremental rate hike. These minor adjustments have little immediate impact on the economy, but the psychological impact on the markets can be relatively large and it’s the shift in the direction of the policy that takes time for the markets to digest. We anticipate a spike in volatility if we see a rate increase this month, but expect it to be temporary.
In the past, presidential elections have consistently added their own element of uncertainty, and we expect this year to be no different. We have narrowed down the field, and our nation continues to be divided. Both sides are anticipating the worst with the election of the opposing candidate, and the markets will continue to react until we have a decision. Once a candidate has been elected we expect the markets to adjust relatively quickly to the idea of what the next four years may bring.
Our portfolios have experienced a mostly positive 2016, and with the recent turn-up in international and global commodities markets, our diversified accounts are performing well. We expect this trend to continue, and global manufacturing to accelerate over the coming year. As we discussed last quarter, this increased demand for raw materials drives growth in the emerging economies which produce them, and spurs a self-perpetuating cycle.
We continue to be optimistic about the global economy, and although we anticipate a fairly choppy second half of 2016, fundamentals should remain sound, and we expect that conditions should yield a net positive result for equities.