We have had relative calm in equity markets since February, which has given us an opportunity to improve the quality of our portfolio. The dollar drop has also been a bailout for the industrials and the oil companies. Overall the growth of the U.S. Economy has been tepid but not recessionary. The Baltic Dry Index has rebounded and stabilized around 600.
There are still some uncertainties out there, that could create more market volatility but won’t, because Governments and Central Banks will continue to adjust to calm the markets. The potential of a Grexit (i.e. Great Britain’s exit from the European Union), while posing potentially catastrophic risks to the Global economy per IMF Chief, Christine LaGarde, likely will not happen. Even if it does, there will probably be some other agreement put in place that continues an economic relationship between Great Britain and the European Union.
There are some estimates that claim there is a 30% chance that the Fed will raise interest rates again in June. However, as much as they would like to normalize rates, I still believe that the Fed will not raise them. U.S. and World economic data is just not strong enough to reflect sustained economic growth. The Fed does not want the dollar to significantly strengthen relative to the other major currencies and curtail the recent strength in oil prices and U.S. industrials. The Fed, however, wants to keep the prospect of higher rates front and center, so it does not come as a surprise when they eventually do raise rates.
The U.S. Elections present uncertainty at home and abroad. While it will likely come down to Trump vs. Clinton, no one really knows who will win and what their policies will be. Both of them can have a positive impact on the U.S. economy, and hopefully that impact can be focused on reduced regulations and meaningful tax reform.
I believe that many of these uncertainties will be cleared up by the fall and the back half of the year will be better than the first. In the meantime, I expect that investment markets will overreact and under-react to headlines over the summer months. Those reactions will present investment opportunities that we can convert to positive returns for our portfolios. My overall opinion on the markets remains cautiously optimistic. Tactically, we can outperform the market this year by maintaining quality stocks in our portfolio and taking advantage of opportunities when they present themselves.