|During the first quarter, investors weathered a squall in the credit and equity markets and awaited clues on the path of U.S. interest rates in 2016. Unfortunately, the Federal Reserve was not definitive about the timing of future rate increases, but focused on weaker global economic growth, deflation risk, and financial market volatility during the quarter. We would like to articulate our stance and how we have managed your portfolio in this environment.
First, in terms of US economic data, we remain upbeat. With 632,000 jobs added during the first quarter and the unemployment rate now at 5%, wage growth is finally picking up. As a result of the strong job market, people who left the workforce are returning and finding employment. As far as inflation is concerned, core measures, which exclude volatile energy prices, are in the area of 2% year-over-year. Low inflation, yes. Deflation, no.
Second, fears of a recession sparked by the decline in oil prices sent equity prices swooning and credit spreads wider in the first half of Q1. We think one of the most important roles of an investment manager is to stay calm when presented with market volatility–especially if the market moves contrary to our longer term views. We did not flinch, and given our fundamental view on the economy, we remain constructive on areas of the credit and equity markets unduly punished by fears of a recession.
In the bond market, the 1/4 of a percent increase of the US federal funds rate in December had no impact on long term interest rates. While we anticipate one or two increases in short-term interest rates during the remainder of 2016, we do not foresee significant increases in longer term rates in the year ahead. Non-energy corporate balance sheets continue to be decently healthy and, in general, earnings expectations are favorable.
What can derail this outlook? The geo-political situation is unpredictable. However, it is not practical to make investment decisions based on unpredictable events. As the history of the firm has shown, our emphasis on liquidity, diversification, and taking action when necessary has served us well.