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Securian Financial

The Economy and the Markets | First quarter 2016

Our forecast for higher volatility this year lived up to expectations right from the start. Stock, commodity and credit markets tumbled early in the quarter as oil prices fell to mid-$20s a barrel and emerging markets growth expectations waned.

The threat of a slowing China and its surprise currency devaluation drove stocks down and caused global policy makers to adjust policy direction and emphasis. Commodity prices and inflation expectations fell to levels last seen in 2009. U.S. economic data were similarly weak in the first half of the quarter evidenced mostly by weak industrial activity and slumping business sentiment.

It was central bankers to the rescue in the second half of the quarter. Japan’s central bank surprised investors with a negative interest rate policy. The European Central Bank (ECB) deepened its policy of negative rates and added corporate bond buying, along with an additional package of long-term lending programs for banks. Initially, the negative rate policy was a blow to European and U.S. financial institution stocks and bonds as it could severely threaten banks’ interest margins. And finally, the Federal Reserve (Fed) signaled a policy pause at its March meeting, lowering its forecast from four to two rate increases this year. These actions, along with improving economic data in the U.S. and around the globe, gave markets a boost.

The S&P 500 Index rose 13 percent from its mid-February low. Oil prices rose to near $40 a barrel by the end of the quarter, boosting energy and MLP stocks and bonds. High-yield bond spreads snapped back by 183 basis points and investment-grade corporate bond spreads narrowed 52 basis points from their widest levels. Interest rates, however, reversed their slide only slightly. The 10 year U.S. Treasury yield remains 50 basis points below where it started the  year. Negative interest rate policies in Japan and Europe, where two-year government bond yields range from -0.25 percent to -0.5 percent, will likely keep U.S. rates low.

Fixed Income

Interest rates fell, credit spreads were very volatile and weak fixed income liquidity clearly accentuated the market’s wild moves in the quarter. Treasury yields fell across the curve with the two-year falling about 30 basis points and the 

10-year ending the quarter at 1.77 percent. Credit spreads moved wider during the quarter and were highly sensitive to oil prices. Spreads peaked in mid-February with the bottom in oil and then narrowed quickly with oil’s rebound. As a result, spreads made a complete round trip to close almost exactly where they started. The catalyst for the rebound was the ECB’s new program and the Fed’s patience in normalizing interest rates. Despite the rebound in credit spreads, bond market liquidity remains weak. New issue and benchmark bonds trade sometimes points above the same credit issued just last year. Dodd-Frank’s limits on market making and trading for banks continue to be a headwind against investors liquidity needs.

Investment grade bond spreads

Source: Bloomberg


The S&P 500 peaked in May 2015 and has suffered two 10-plus percent corrections since, one in third quarter 2015 and now the second in the first quarter of 2016. The Fed and the ECB want to keep stock prices elevated to support the economy but stock fundamentals aren’t cooperating. The S&P 500 barely eked out a total return of about 1 percent after a wild ride in the quarter. S&P 500 company earnings growth has been in a slump. Anticipation of the fourth quarter of negative earnings growth is weighing on investors and adding to volatility. We expect stocks to remain troubled until the earnings path is more sustainable.

Real Estate

Real estate stocks faced the same sensitivity to oil and credit market volatility as broader equities, registering dramatic fluctuations throughout the quarter. Ultimately the sector posted a 5 percent total return, easily surpassing the S&P 500. Fears were that a slowing domestic economy and a tightening credit market could halt the commercial mortgage backed securities (CMBS) market. These concerns proved to be overblown.

Fundamentals in real estate continue to propel the market and while fundamentals remain strong, they aren’t accelerating. We believe we’re reaching the later stages of the real estate cycle. However, the typical forces that have caused large corrections aren’t present today. Demand still exceeds supply across the major property sectors, speculative construction activity is minimal, and both property pricing and lending standards remain rational. In an environment of positive GDP growth and 1.5 percent – 2 percent employment growth, real estate operating conditions should remain favorable. Still, we are mindful of peaking internal growth levels and believe the sector is reliant on continued economic improvement to sustain current operating conditions.


We expect the U.S. economy to continue its weak but steady growth trend. It should improve in the coming quarters from 1.4 percent in fourth quarter 2015. Longer term, slowing growth in China and other emerging markets may keep a lid on U.S. growth but we don’t think it will send the U.S. economy into recession anytime soon. Employment gains have remained steady. Housing and auto sales are other bright spots with steady but unspectacular gains. The prospect of recession, while highlighted in the press in the first quarter, seems premature. The pace of credit expansion and re-leveraging has been significant in the corporate sector, but it’s been weak across the household sector and the combined corporate and household credit growth hasn’t been enough in this expansion to be a catalyst for a deep downturn.

Stocks didn’t respond well to the prospect of faster rate hikes. Should the Fed become more hawkish and the dollar rise, the negative feedback loop may kick in again from emerging markets. Fundamentals in stocks aren’t that supportive for higher stock prices either. Even though much of the earnings weakness is due to the energy sector’s fall, an earnings recession of the length we are experiencing rarely occurs.

Anticipation of the fourth quarter of negative earnings growth is weighing on investors and adding to volatility.

The list of risks seems to be lengthening. The impact of the U.S. presidential election on markets has been limited thus far, but U.S. political risks may soon start to play a role. Protectionist policies have become popular with candidates and heightened rhetoric against trade would certainly be a negative for the U.S. and global growth.

Beyond protectionism, the threat of terrorism in Europe is now expected. The bombings in Brussels only underscore weaknesses in mitigating such threats and the challenge of dealing with massive immigration. In addition, policy and politics will continue to add to uncertainty as the United Kingdom entertains exiting the European Union in the coming quarter. While the U.S. remains the bright spot in the world economy and investment markets, the constant economic and political pressures from both inside and outside the U.S. borders make investing analysis more than just a domestic exercise.


Bloomberg is the source for statistical data unless otherwise noted.

Investment risks associated with real estate investing, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes, and differences in real estate market values. Investment risks associated with international investing, in addition to other risks, generally will include currency fluctuations, political, social and economic instability and differences in accounting standards when investing in foreign markets.

Fixed income securities are subject to credit and interest rate risk and, as such, values generally will fall as interest rates rise.

Investments will fluctuate and when redeemed may be worth more or less than originally invested. Past performance is not indicative of future results.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This commentary should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Opinions expressed herein are those of Advantus only. Investors should keep in mind that markets are volatile and unpredictable.

This article contains forward-looking statements based on expectations and assumptions. Actual results could differ materially because of changes to these expectations and assumptions. The Economy and the Markets has been prepared for informational purposes only and is the opinion of Advantus Capital Management, Inc., a registered investment advisor.

Advantus Capital Management is a subsidiary of Securian Financial Group.

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