Where Did Investing Money Go In Q1 2016?

by: Daryl Montgomery

U.S. stock sectors that generally perform well in bear markets did best in Q1 2016.

Three commodities performed better than any U.S. stock sector in Q1.

Commodity-based emerging markets, especially in South America, were the real stars in the first quarter.

Investors need to pay attention to quarterly asset returns because they reveal what areas money is leaving and where it is going. Once a shift in funds begins, it can continue for many months to many years. More money being invested of course means higher prices and greater profits. Some very major shifts were taking place in the first quarter of 2016 and these can be summarized as a global movement toward commodity-related stock markets and within the U.S., as a movement toward sectors that do well in bear markets.

Three of the best performing assets in the first quarter of 2016 were commodities: lean hogs (CME cash settled), lumber futures, and gold (NYSEARCA:GLD), which were up approximately, 24%, 20% and 16% respectively. Only one sector of the U.S. stock market came anywhere close to gold's performance - Utilities (NYSEARCA:XLU). It was up 15.5%. Both gold and utilities are safe haven plays that investors retreat to when they see high levels of risk in the financial or political system. In the U.S., both tend to do well in stock bear markets. The second best performing sector in the Q1, up 5.6%, was Consumer Staples (NYSEARCA:XLP). This is also a leadership group in stock bear markets. However, the third best sector, up 5.2%, was Industrials (NYSEARCA:XLI), and this tends to be a leadership group in stock bull markets. So, the U.S. stock market profile is not completely bearish, but mostly so. Below is a chart of the returns of these sectors compared to the S&P 500 (NYSEARCA:SPY), shown as the black line. Utilities are in yellow, Consumer Staples in blue and Industrials are in red.

Q1 2016: Top Three Stock Sector Returns Compared to the S&P 500

On the flip side, the worst performing stock sectors: Healthcare (NYSEARCA:XLV), Financials (NYSEARCA:XLF), and Consumer Discretionary (NYSEARCA:XLY), also mostly support the view for a stock bear market. Financials and Consumer Discretionary, down 5.1% and up 1.6%in the quarter, are leaders in stock bull markets and laggards in bear markets. It is a plus for the bullish view, though, that Consumer Discretionary stocks at least were up on the quarter. Healthcare was a leader in the recent bull market because of its high flying biotech stocks. Many argue these stocks were in a bubble that is now bursting. While the Healthcare sector has been a safe haven in the past, it was down 5.6% in the first three months of the year. Its poor performance can't be considered a plus for the bulls because healthcare was one of the leading sectors on the upside this time around (it was the second best performer in Q4 2015).

While an analysis of stock sector performance at the beginning of 2016 seems pretty bearish for stocks, commodity sector performance is perhaps not quite as bullish as it appears at first blush. Commodities in general, peaked in 2011 and have had sharp drops since then until many of them started to move up in the last few months. Gold is a good example of this and it tends to be a leader in this asset class, so its strong performance in the first quarter is a sign of bullishness. This is not necessarily the case for lean hogs and lumber however. Lumber peaked in 2013 and lean hogs in 2014 (because of a disease that killed a large number of piglets), so they are both off-cycle from other commodities. Their price movements can't therefore be generalized to the sector. This view is supported by examining the returns of broad-based commodity ETFs such as DJP. It had approximately the same returns as the S&P 500 in the first three months of 2016.

There is other evidence of a broad-based commodity rally, however -many commodity-based countries' stock markets had strong moves up during the first quarter. This showed up most obviously in Latin American markets. While the S&P 500 was up a paltry 0.8% in the first quarter, stock markets in Peru (NYSEARCA:EPU), Brazil (NYSEARCA:EWZ), Columbia (NYSEARCA:GXG), and Chile (BATS:ECH) were up 31%, 27%, 22%, and 16% respectively. Even the long-suffering Russian market (NYSEARCA:RSX) was up 16%. Below is a chart of South American markets' returns compared to the S&P 500. Brazil is the gold line, Chile the red line, Columbia the orange line and Peru the blue line.

Q1 2016: South American Market Returns Compared to the S&P 500

Money is definitely moving around globally and while the U.S. may be one of the better choices among developed markets, emerging markets seem to have more promise going forward. This is part of a bigger picture of an early-stage commodity rally. Investors within developed markets are moving toward the safe-haven choices and investors who wish to keep most of their funds in stocks in the U.S. should consider shifting them away from the higher risk sectors and healthcare.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.