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An Ugly Start

How to interpret the volatility at the beginning of 2016

If investors were hoping to put the stock market volatility of 2015 behind them, they were undoubtedly disappointed to see the Dow Jones Industrial Average drop 5.5 percent and the NASDAQ go down nearly 8 percent in January.

To gain some perspective, SFBW interviewed Jonathan Hill, senior vice president and director of investments at Gibraltar Private Bank & Trust (gibraltarprivate.com), which has five offices in the tricounty area. Hill brings unique insight as a former trader analyst for the Federal Reserve Bank of New York and a trading desk assistant at ABN AMRO Bank in London.

In January, you told our readers how 2015 was a difficult year. Were you surprised about the continued volatility at the start of 2016?

While we have been writing about the return of risk to markets for a long time and have prepared portfolios appropriately, the magnitude and ferocity of the declines in global stock markets has been greater than even we anticipated.

2016 started with the same lingering fears over global growth, the Chinese economic outlook, commodity price declines and concerns regarding the potential path of the U.S. economy and Federal Reserve policy.

The year also began with a spike in geopolitical tensions stemming from North Korea’s possible nuclear test and a dispute between Saudi Arabia and Iran. This backdrop has weighed on investor confidence and contributed to volatility.

Still, very little has changed fundamentally. The outlook for China was known to be weak. It is likely to continue to be weak during a lengthy transition from a manufacturing-based, export-led economy to a more consumer-led, domestic economy.

What about the impact of lower oil prices?

The sustained fall in the price of oil is weighing heavily on energy and mining stocks and is having an outsized impact on the high-yield bond market. Finally, the slowdown in U.S. corporate earnings has also long been recognized as a function of the decline in energy revenues, weak international demand and a strong dollar.

Was there really any place for investors to hide last year?

The most notable aspect of last year was the lack of any substantial positive returns, regardless of asset class, including commodities, emerging markets, gold, high-yield bonds, small-cap U.S. stocks and international stocks. It is indicative of a tough year when municipal bonds were the best performing asset class – and they only returned a little over 3 percent!

What does the market turbulence signal about economic growth?

While investor confidence has been rattled by the recent volatility, overall consumer and corporate optimism remain constructive. There are only limited signs that the market’s global growth concerns have begun to negatively affect U.S. economic activity. As of early February, the jobs markets and the U.S. service sector were still showing positive growth momentum.

The idea that the stock markets are a good indicator for imminent recessions is countered by the oft-quoted economist refrain that Wall Street has predicted nine out of the last five recessions.

What are you looking at in terms of portfolio weightings these days?

For our clients, we place the emphasis on risk management and providing truly diversified portfolios that are appropriate for more than one single scenario.

We are recommending that portfolios be neutral-weight U.S. equities, modestly overweight international developed stocks and underweight emerging markets. The outlook for emerging economies and commodities remains weak and we will maintain an underweight allocation to both asset classes as a result.

We have been underweight bond allocations in portfolios in anticipation of yields rising as the Fed raises rates, but we are likely to normalize bond allocations in light of the recent volatility and the prospect that the Fed will pause rate hikes. We still see value in municipal bonds. ¿

Hill can be reached at jhill@gibraltarprivate.com or 305.476.1982.

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Drew Limsky

Drew Limsky

Editor-in-Chief

BIOGRAPHY

Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.