Markets in perspective – March 2016 in review

Capital Markets Returns 3-31-16 Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. The following is the Russell Investments Chief Investment Officers’ views of the key themes affecting market performance in March 2016. All data is as of March 31, 2016. Sources and indexes used to represent asset classes can be found in the disclosures at the end of this post.


1.  Fed slows pace of tightening Concerns about market volatility, global growth and inflation expectations led the Federal Reserve (Fed) to adopt a more cautious approach to hiking rates. While hawkish members have voiced disagreement, Fed leadership appears content to now raise rates twice in 2016 – a view that is consistent with our own Global Market Outlook - Q2 Update Report. 2.  Recession fears drop as U.S. economic data strengthens The U.S. economy proved resilient again at the start of 2016. The labor market added over 200,000 jobs per month in the face of significant uncertainty. The manufacturing sector showed signs of bottoming out. The U.S. economy continued chugging along, and that was good enough to drive a rebound in investor sentiment for March. 3.  U.S. dollar weakens The U.S. dollar depreciated 4% over the first quarter of the year. We view this behavior as consistent with the dollar peaking as expensive valuations and a slower pace of Fed rate hikes (from four to two) limited further upside.


1.  Equities fell, but then rebounded intra-quarter First quarter was a tale of two halves -- the first half was a risk-off environment with stocks following energy prices lower as investors feared a global slowdown. Mid-quarter, oil prices stabilized, and central bankers took note of market volatility. This reassured investors and helped shift the tide by boosting equities to be slightly positive for the quarter. Emerging markets was the most notable recovering segment rising 13% in March alone. 2.  Macro-driven market overshadows security selection With the market’s macro focus, bottom-up stock selection strategies were less effective as investors panicked and gravitated toward perceived safety. Consequently, defensive stocks overtook dynamic stocks and outperformed by approximately 5% in large cap and 9% in U.S. small cap. Growth stocks typically lagged value stocks by a small margin as higher growth and momentum stocks rolled over. Industry payoffs showed big deviations as well with U.S. large cap banks underperforming by 13%, while the energy sector rose 9% globally. Utilities rallied across all regions with U.S. large cap utilities outperforming by 1,400 basis points, the best quarterly performance since 1998. Biotechnology stocks were down significantly with the most acute underperforming the Russell 2000 by 28%. 3.  U.S. dollar weakens and commodities rally The U.S. dollar weakened due to diminished expectations of interest rate hikes. As a result, non-U.S. equity returns moved higher in U.S. dollar terms. Returns associated with currency gains were further amplified in commodity-rich regions, such as Canada and Australia, as materials and energy sectors bounced back. During the quarter, the Canadian dollar appreciated by approximately 7% while the Australian dollar appreciated by approximately 6% versus the U.S. dollar. A much stronger Japanese yen coupled with policy challenges meant Japan significantly lagged other markets.


1.  Rates lower globally Government bonds rallied amid sluggish global growth, a dovish U.S. Fed, and the announcement of further stimulus from both European and Japanese central banks. 2.  Credit recovers Credit markets outperformed globally. This was led by industrials and driven by a bottoming oil price, central bank accommodation and a firming U.S. economic outlook. 3.  Emerging markets bounce back Emerging market bonds and currencies outperformed most sectors as commodity prices and negative investor sentiment appeared to bottom out. This was combined with modest U.S. dollar depreciation given a more dovish Fed and an uptick in inflation.


1.  Equities rebound Real Estate Investment Trusts (REITs) and listed infrastructure experienced acceleration in total return. This coincided with a shift in market sentiment from defensive to more risk tolerant. Long-biased, equity-oriented hedge funds benefited from the rally in emerging markets and global equities. 2.  Global central bank policies diverge Slower Fed tightening and signals of dovish outlook affected rate-sensitive REITS and listed infrastructure. This also contributed to strong utilities performance. Listed infrastructure continued to be affected by the spread between U.S. and Eurozone short-term yields, which is close to historic highs. Negative rates in Japan, combined with Bank of Japan (BOJ) stock purchases created significant divergence in performance of Japanese REITs versus Japanese developers. 3.  Commodity prices stabilize Commodities rebounded in March. There were gains across most sectors in the Bloomberg Commodity (BCOM) Index. Energy was the best performing sector, up almost 8% thanks to rallies in oil and natural gas. The surge put the BCOM Index into slightly positive territory for the year, +0.42% year-to-date, but questions remain around the fundamental and macro drivers for the underlying sectors. Increased crude prices in the first quarter helped boost the listed infrastructure pipelines sector by over 14%.

Asset Class Dashboard – March 2016

Compared to the first two months of the year, the March reading of the Asset Class Dashboard shows the 12-month return for most asset classes are now well within their typical range and are getting much closer to their historical averages. Following the rebound in March, several asset classes are now showing positive returns for the last 12 months, with emerging market debt and large cap defensive equities leading the way. Only small cap equities, commodities and cash have 12-month returns that falls outside of their historical typical range, compared to seven asset classes in February and five in January. ACD March 2016 Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Bloomberg Commodity Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index.   How do I read this chart? This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes. The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index's history available for the dashboard calculation. Here is how to read the graphic on this page: FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes. A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes.

The bottom line

The rebound that the markets saw in March serves as a great reminder to investors of the importance of staying focused on their long term investment strategy and not overreacting to short-term market volatility.
All data is as of March 31, 2016. Corresponding indexes/sources by section: Economic factors • Oil represented by WTI crude prices Equities • Oil represented by WTI crude prices • Emerging markets represented by the Russell Emerging Markets Index • Sectors represented by Russell 1000® Index sectors: Utilities, Financials, Biotechnology, and Energy • Currency returns source: Bloomberg • Non-U.S. represented by Russell Global ex-US Index • Defensive represented by Russell 1000® Defensive Index • Dynamic represented by Russell 1000® Dynamic Index Fixed Income • Broad fixed income represented by the Barclays U.S. Aggregate Bond Index • Government bonds represented by Barclays U.S. Treasury Index • Emerging market bonds represented by EM USD Aggregate Bond Index • Investment grade bonds (credit)represented by Barclays U.S. Corporate Investment Grade Index • High yield represented by high yield sector of the Barclays U.S. Aggregate Bond Index • Japanese bonds represented by the Bloomberg Japan Sovereign Bond Index • European bonds represented by the Bloomberg Eurozone Sovereign Bond Index Alternatives • Commodities represented by Bloomberg Commodities Index Total Return • REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index • Infrastructure represented by S&P Global Listed Infrastructure Index • Oil represented by WTI crude prices • Hedge fund strategies data as observed across third party managers by Russell Investments These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. 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Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. 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In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position. Barclays U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. FTSE EPRA/NAREIT Developed Real Estate Index is a global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets. The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Past performance does not guarantee future performance. This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes. 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