March Madness Reigned on the Courts in the NCAA Basketball Tournament & in Our Global Financial Markets

Upsets galore in early rounds continued through the Elite Eight and into the Final Four with only one #1 seed left in the contest. That team happens to be the UNC Tar Heels, whose home is right here in Chapel Hill.
While January and early February were tough sledding for the bulls, the bears got their comeuppance in late February and March.
February 11 proved to be the bottom of this year's version of the global growth scare. From that point on   commodities notably oil, emerging markets and high yield debt soared in price along with a broad array of stocks.  Yields in mid-February for junk bonds approached 2009 levels as oil hit $26/bbl. Panic gripped investors in many asset classes  as doom and gloom spread and prices plunged. But wait........
Just as we experienced on numerous occasions since the 2009 bottom, Central Bankers came to the market's rescue. Large and small capitalization stocks roared back to life as shorts ran for cover. Oil prices rallied more than 50%.
High bearish sentiment set the stage for this Bull Run as the Fed backed off its 4th rate hike goal set last December. The ECB went for more QE in Europe, China loosened credit standards and Japan stayed the course with negative interest rates.
The U.S. dollar retreated 6% from its Dec 2,2015 trade weighted high of 100.51 easing fears of an  earnings collapse for big cap U.S. corporations. This also helped emerging market economies, by taking pressure off commodity prices and their dollar denominated debt.
The Presidential contest has narrowed to five candidates. Nominees are to be decided upon in late July. Many voters are looking for a new hero not of the "ruling elite." Millennials and students wish to be rescued from college debt, blue and low pay white collar workers from stagnant pay scales.
Seniors fret over Social Security and Medicare, both underfunded. Social Security will be forced to reduce benefits in the not too distant future if something is not done soon.
Financial markets are buffeted by ever changing rules.  Central bankers change course as the fits of markets dictate. The Golden rule states.He who has the gold makes the rules. Central Bankers are modern day market kings and queens.
Ms. Yellen wants to get back to “normalization" for U.S. rates, but due to global economic concerns keeps delaying rate hikes.
Neither the Eurozone nor Japan can normalize due to slow or no growth economies.  Yellen retreats and hopes for better times down the road.  The Fed and most economists did not foresee the years of sluggish economic growth the past debt crisis would bring. Central bankers lend, extend and pretend all is well.
Fiscal austerity in Europe and discretionary government spending in the U.S. at 2008 levels have kept inflation low for 8 years. Politicians are frozen in their ideologies. Labor markets have improved but few feel like things are really good.
As Shakespeare once said, "All's well that ends well!" Markets are back to flat or up slightly up for the year. We have smooth sailing for the moment as the storm has calmed and sea monsters in China and other hot spots have submerged back into the depths.
 If we are to prosper in choppy markets it’s important not to panic and stay with your plan. Utilities and Telecoms lead the market this year after lagging last year. Energy is up in 2016 while Healthcare is down after respective horrendous and brilliant years for each in 2015.
With SPX at 2066, consensus estimates of $120.20 according to Yardini Associates, the P/E rests at  17.2 x forward earnings .While this is higher than the 5 and 10 year averages, in  light of a 1.78 % 10 year Treasury yield, German bunds at 0.15% and Japan notes at -0.04 % completion is not stiff. The reciprocal E/P derives an earnings yield of 5.8%.
It's been hard for active managers to figure out the rules of the road. Few are confident about earnings or growth levels at this late stage in an economic cycle.
Price gaps in markets have been a product of Dodd Frank regulation reducing market participation by banks and brokers as intermediaries. No uptick rules for shorting, plus algorithmic traders make plunges and screams higher more common.
Merrill Lynch reports we have record liquidity in client accounts as fear leads to under investment and caution. Two trillion dollars rests offshore rather than being invested here by U.S. corporations who refuse to repatriate cash and pay a world high 36% tax should they do so.
Computer programs with algorithmic settings move markets in moments, rather than in minutes or hours.
Leading hedge fund managers are struggling for positive returns as are 90% of portfolio managers. Active strategies are losing to passive ones.
Mutual funds are losing assets to ETF's. Cost of financial transactions has gone down for clients, but spreads, have gone up.
There are opportunities created by this seeming chaos.
Closed end funds that sell at big discounts approaching 2009 -2010 levels are one example.
We expect continued market volatility and slow growth in all economies. The Consumer at 68% of the U.S. economy is strong balance sheet wise and steady.
We are inclined to take more duration risk with high quality bonds as inflation is nowhere to be found. Longer dated AAA or AA bonds tend to rise when stocks fall and work well to balance a portfolio.
While the SPX may not be historically cheap more and more individual names got very cheap in the not so stealthy bear market we have lived through.
The Russell 2000 ETF index symbol -IWM - went from 123.10 on 6-23-2015 to 93.6 on Feb 11, 2016. That 24% drop in 8 months qualifies as a genuine bear market.
It has become crystal clear that the crowd is more often wrong rather than right. When values appear one must grab them quickly.
The rules of the game are ever changing as new market masters ply their trade.
The news cycle is short and negative. “If it bleeds, it leads", as the news room saying goes.
It is hard to stay patient and steady when the world appears to be falling apart around us. The 1820 SPX support zone has been tested 5 times since April 2014. The top of this zone is 2134 which we may see again before this year is out. The SPX closed +0.8 % through the quarters end.
In the long run, the country and markets seems to muddle through.

Doug Coppola

John Coppola

April 1, 2016

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