May 2016 Monthly Insight

Adam E Bray CFP^®
Chief Investment Officer

Table 1: Key Index Returns 

_{Source: Wall Street Journal, MSCI.com
MTD returns: March 31, 2016—April 29, 2016
YTD returns: December 31, 2015-April 29, 2016
*Annualized
**In US Dollars} 

The economy
Let's start with the economy. Economic growth drives profit growth, and profit growth is the biggest factor that drives stock prices over the longer term.

On the one hand, fears of a recession that were present in January have receded, which have helped shares recover from a modest sell-off early in the year.

Preliminary data released late last month shows that first quarter GDP grew at an annual pace of 0.5%, down from a sluggish 1.4% rate in the final quarter of 2015.

There is another piece of research that suggests first quarter GDP may be inherently weak thanks to an apparent deficiency in the complex models that adjust for seasonal influences.

However, over the last 25 years, we've witnessed a statistically significant drag on first quarter growth, which is graphically illustrated in Figure 1.

_{By year's end, it all washes out, but seasonal distortions that aren't accounted for in the current models may be overstating 2016's lackluster start.}

The ebb and flow of the dollar
A second drag on stocks over the last year has been the strength in the dollar. For companies doing business primarily at home, it doesn't have much of an effect.

But for those larger multinationals that depend on a significant amount of sales from overseas, King Dollar has hurt at the margin.

While a U.S. citizen traveling abroad benefits from a strong dollar, a U.S. corporation must translate foreign sales back into more expensive dollars, which nibbles away at revenue. Think about a foreign tourist visiting the U.S.

As we entered May, the dollar had slipped to its lowest level in over a year against several major currencies (MarketWatch).

Looking ahead
The Fed appears to be on the sidelines right now, so let's take a quick peek at Europe. In June, Britain will vote yes/no on a referendum to remain in the European Union (E.U.). Coined "Brexit," a vote against remaining in the 28-nation federation could create a new round of uncertainty in Europe.

The latest polls put those who want to remain in the E.U. in a slight lead (Reuters), which suggests this issue may get more coverage in the days and weeks ahead.

Markets hate heightened uncertainty, which could add to volatility in stocks.

Stick with the plan that has been purposely crafted for your unique situation. Markets will go through cycles that take us to new highs and markets will also enter periods of volatility. Making decisions in haste based on an emotional reaction to current circumstances is rarely profitable over the long term.

_{These are the opinions of Chief Investment Officer Adam E Bray CFP® and not necessarily those of Cambridge. The views expressed herein are for
informational purposes only and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested
into directly. Past performance is not a guarantee of future results.}