Since reaching year-to-date lows in early February, global equity markets have rallied nearly 10% and have recouped a majority of the losses for the year. What has been most surprising has not been the pace of the recovery, but the factors that have contributed to it. While U.S. employment and manufacturing numbers over the last month have been better than expected, highlighted below are a couple of additional items that have contributed to the recent rally.
Over the long term, the price of oil maintains a low correlation with equity prices. However, during periods of short term volatility, correlations can be much higher. This year, equity and oil prices have moved in lockstep, not only on the downside seen earlier in the quarter on global oil supply concerns, but more recently on the upside as those fears subsided.
Global Monetary Policy
While improving economic and employment data allowed the U.S. Federal Reserve to raise U.S. short term interest rates at the end of 2015, global central banks facing fiscal and economic challenges have instituted policies aimed at accomplishing just the opposite. European and Japanese central banks have been active in purchasing their own government and corporate debt – publicly offering further support over the last month. These policies have pushed many European and Japanese government bond yields that were near zero in 2015 to negative. It has yet to be determined what the effect on the real economy will be, but both stocks and bond prices have moved higher.
The recent volatility in the markets has not altered our long term view on risk oriented assets. We continue to expect mid-to-upper single digit returns from a globally diversified equity portfolio and market volatility as of recent will be more of the norm rather than the exception we have become accustomed to seeing over the last five years. If you have further questions about your portfolio or would like to review your goals, please contact your SNB Wealth Management Advisor.
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