A Turbulent Start to 2016 -The First Quarter In Review

Currencies

Down Goes the Dollar

The big story in currencies in the first quarter of 2016 was the decline in the dollar. The dollar rose during 2015 on the expectation that the U.S. Federal Reserve would begin the rate hiking process and “normalize” interest rates. In 2016, the Fed was expected to engage in a rate hiking path, while its counterparts at the Bank of Japan (BOJ) and European Central Bank (ECB) were expected to continue with their negative interest policies and stimulus programs. The BOJ and ECB have kept to their predicted paths. In early March, the ECB expanded their quantitative easing program and lowered interest further.

With the Fed tightening and the ECB and BOJ easing, the dollar was expected to rise. It didn’t work out that way. The Fed has not raised rates yet in 2016 and has reduced market expectations for rate hikes in 2016 from four to two. The backing off of Fed rate hikes, even with the BOJ and ECB keeping rates negative and engaging in additional stimulus, has caused a decline in the Dollar Index of 4.4% with corresponding rises in the Euro and Japanese Yen of 4.87% and 6.83%, respectively. The Euro’s gain in the first quarter was the strongest quarter in five years.

Precious metals were the big winners in the first quarter of 2016.

Precious Metals

Gold Shines

Precious metals gold, silver and platinum were the big winners in the first quarter with gains of 16.25%, 11.55%, 9.64%, respectively. Precious metals prices were at multi-year lows at the start of 2016. Lower prices helped make them more attractive to cyclical investors. Further boosting precious metal prices were the negative interest rates on many sovereign bonds that also made investing in precious metals more attractive. The stock market turbulence at the beginning of the year, with many equity indexes declining 10% or more in January, also had investors rushing to the safe haven of gold. Gold’s first quarter performance was its best in nearly thirty years.

Stocks

Stocks crashed then recovered

U.S. and global equities opened 2016 on the wrong foot. U.S. equity markets had their worst January on record and hit their nadir in mid-February. Stocks staged a rally in the last six weeks of the first quarter and ended March about where they opened at the beginning of January. The Dow Jones Industrial Average ended the first quarter with a slight gain of 1.73%, while the S & P 500 rose 0.91% and the Nasdaq 100 fell 2.72%.

Oil

Oil crashed then recovered a bit

Oil prices also took a rollercoaster ride in the first quarter. Oil had a very rough quarter with prices plummeting while output surged. Record inventories were recorded during the first quarter and Iran began selling oil into Europe as sanctions were lifted. The price of oil rose towards the end of the quarter on incessant chatter that the oil producing nations would agree on a production freeze.

Politics

Anti- Establishment Candidates in Both Parties Had Strong Showings

While Hillary Clinton and Donald Trump are leading the Democratic and Republican parties’ delegate races, neither had sewn up their respective nominations by the end of the first quarter of 2016.

The Democrats

The Democrats held thirty-five primaries or caucuses in the first quarter of 2016. Vermont Senator mounted a strong challenge to front runner Hillary Clinton, winning fifteen of those primaries or caucuses, including the last five. Ms. Clinton’s email scandal refuses to go away even though her rival Bernie Sanders nor the media have made a major issue of it. There are twenty-two more primaries or causes in states that should be more favorable to Ms. Clinton, with the last being held on June 14 in the District of Columbia.

The Democratic Convention will be held July 25-28 in Philadelphia, PA.

Ms. Clinton appears to have an insurmountable lead over rival Bernie Sanders.

The Republicans

The Republicans held thirty-three primaries or caucuses in the first quarter of 2016. Donald Trump has won twenty-one of them with challenger Ted Cruz taking nine, Marco Rubio three and John Kasich winning one.

The behavior of the candidates and their supporters and protestors became the main issues in the Republican Party primaries with violence erupting at some Trump rallies and accusations of battery by a reporter against Trump’s campaign manager. Front runner Donald Trump and challenger Cruz accused each other of dragging their wives into the campaign in unflattering fashions. Ted Cruz fought off a National Enquirer story alleging a handful of extra marital affairs. During the Trump/Cruz battles, the Republican establishment strategized how they might find an “acceptable” alternative to either Trump or Cruz, at one point trotting out 2012’s failed Republican candidate Mitt Romney to argue against a Trump candidacy.

There are seventeen more primaries or caucuses with the last, including California’s primary, to be held on June 7. The Republican Convention will be held July 18-21 in Cleveland, Ohio.