“The stock market has forecast nine out of the last five recessions. “   — Paul Samuelson

Global equity markets opened 2016 with one of the worst starts on record, before rallying sharply in the last several weeks of the first quarter. Sentiment turned very pessimistic in January, with many investors concerned about a possible economic recession spreading from China and other emerging markets to the U. S.  Oil and other commodity prices continued to fall.

Fortunately, the market’s worst fears failed to materialize as economic reports, particularly in the U.S., showed continued economic growth. In addition, a significant purchase of JP Morgan stock by CEO Jamie Dimon led to a sharp rally beginning in mid-February, with analysts realizing that bank stocks would not be as impacted as they had thought by bad energy loans. By the end of the quarter, most indices showed either modest gains or losses, similar to the result of last year.

cncartoons032102-445Bond prices continued to confound forecasts, with yields in most countries falling as a result of slow growth and negative interest policies pursued by the European Central Bank and the Bank of Japan. Though the Treasury yield curve flattened slightly, yields past one-year maturities fell, with the 10-year Treasury yield down from 2.27% to 1.77%. The relief rally from the “Dimon Bottom” in equities soon spread to high yield and commodity prices, and then to the beleaguered emerging markets.

U.S. economic growth in the first quarter is seen to be weak, continuing a seasonal pattern experienced since the recovery began in 2009. The weather has again been a factor, though not the major one, with global weakness especially weighing on manufacturing.

Hopefully, the second quarter will play to script and rebound robustly, with continued improvement in the job market and bank lending as major factors. A more accommodating Federal Reserve will help, as Chair Janet Yellen has scaled back the pace of the anticipated increases in the Federal Funds Rate.


At this point, the main question is whether the rally in financial assets will continue and evolve into a new leg higher for the bull market, or roll over and test the lower end of the trading range that began in mid-2014.

  • We believe that the next major move will be on the upside, though that may take some time. Stock valuations are not excessive but also not cheap, and significantly higher equity prices will require earnings and revenue growth. Unfortunately, that is not likely until later in the year. In particular, earnings of energy companies are still under pressure, with oil still impacted from global oversupply.
  • Hawaii’s economy should grow faster than the mainland, but it will feel the effects of the global slowdown. According to the University of Hawaii Economic Research Organization (UHERO), the state will grow at 3.2% in 2016 before slowing to 2.1% next year. The job market is tight, with the unemployment rate around 3%, led by a strong construction industry. However, any cooling in the luxury condominium market will moderate future gains in construction.
  • Our investment outlook is unchanged. Investors should avoid getting too pessimistic, as we have experienced several sharp rallies over the last two years following steep declines. Negatives such as the global slowdown and a lackluster near term domestic earnings outlook are well known by now and should recede as the year progresses. Stocks are still attractively priced relative to bonds, even if expected returns going forward are 6-8% instead of the 9-10% returned historically.