Was It All Just a Bad
Six weeks down, six weeks up, finish unchanged. How
else can we characterize the first quarter but as just a
bad dream? After a similar sell-off and rally in
September-December of 2015, the New Year’s renewed sharp
decline raised possibility of another 2009-like panic.
While the major indices were down about 10%, it felt
much worse. Many stocks declined 20%-30%. Fear was
The bogeyman under the bed was the fear of imminent
recession. Growth over the eight years since the end of
the Great Recession in 2009 had been historically tepid
at 2%-2.5%. The Fed’s policy of ultra low interest rates
was just barely keeping the economy moving forward.
There was little room to stimulate the economy with yet
further interest rate cuts. The Fed was pushing on a
string. Corporate earnings were expected to fall, hit by
the collapse in the oil price and a strong dollar. The
stock market, to be generous, was fully valued and had
failed to make a new high at year-end after the autumn
sell-off. Surely this was the beginning of a recession
and bear market.
On February 11, Chair of the Federal Reserve, Janet
Yellen, in a news conference after a Fed meeting
indicated that the Fed did not see recession as
imminent, but was sensitive to market turmoil and would
thereby raise interest rates at a more leisurely pace
than expected. This set off a six week rally in the
market, recouping just about all its losses by the end
of the quarter.
While we welcome the rally (client accounts are up
handsomely as of quarter-end), when we slip under the
covers at night, we continue to be disturbed by events.
Fundamentally, little has changed since year-end. The
economy continues to limp along at a sub-par rate.
Corporate earnings are weak. Bond yields continue at
historic lows suggesting the economy remains weak.
Adjusted for inflation, some bonds have negative yields.
(Investors have to pay for the privilege of lending to
the government!) Stock prices remain fully priced, at
best. Gold has had its best three months in more than a
decade, signaling a certain amount of stress in the
economic and political system. China, ISIS, presidential
politics…little seems to be moving in the right
direction (with the possible exception of the dollar,
which has stabilized, for reasons we find hard to
It remains unclear whether or not the bull market is
dead, though after seven years of rising prices, it is
late in the cycle. Our strategy going forward remains
the same: maintain above average cash balances;
selectively buy on market weakness as we did in the
first quarter; continue to have exposure to gold as a
hedge which worked so well over the last three months;
be willing to take profits. While bad dreams reflect our
anxieties and concerns, well founded or not, they tend
to reoccur over time. We take them seriously.
* * * *
As a Registered Investment Advisor regulated by the
Securities and Exchange Commission, P.R. Herzig & Co. is
required to offer clients copies of our form ADV Part 2.
This form describes in plain English our business and
how we operate. The form can be found on our website,
www.prherzig.com. Hard copies are available upon
request. There have been no material changes in the past
Please read our important notice
about these letters and the securities they mention.