MARKET UPDATE AND COMMENTARY

March 31, 2016

You will notice a new format to my Market Update and Commentary this week.  After listening to feedback from many of you, I have opted to change the way I present information and my analysis.  My goal is to provide readers the ability to quickly scan the report to pull out the key points while still providing some in-depth analysis for those who are interested in drilling down in a little more detail.  I look forward to any feedback you may have.

Market volatility continues to keep investors edgy.  As you can see below, the first quarter saw a terrible January followed by at flat February, and a strong March.  The net result was a mixed first quarter.

Time Period	Dow Jones Industrial Average (DJIA)	S&P 500	Russell 2000	NASDAQ
January	-5.5%	-5.1%	-8.8%	-5.8%
February	0.3%	-0.4%	-0.1%	-1.2%
March	7.1%	6.6%	7.8%	6.8%
1st Quarter, 2016	2.1%	0.8%	-1.9%	-2.8%

Source:  The Wall Street Journal (Past performance is not indicative of future returns).  March 31, 2016

US Dollar weakens in the 1^st quarter.  Despite the continued and expanding use by central bankers around the world using negative interest rates as part of their monetary policies, and a US economy that continues to show slow, but steady growth, the US Dollar weakened nearly 5% against the Euro and 7% compared to the Yen.  This is a hugely important story that will be the focus of my analysis in the next section.

Emerging Markets rally on the strength of commodities.  After years of underperformance, emerging markets rallied in March on the weakness of the US Dollar and posted solid gains.  However, European developed markets (STOXX 600) lagged.

Time Period	Global Dow xUS	STOXX 600	Dow Jones Devel Mkt Region Total Stock Market	Dow Jones Emerg Mkt Region Total Stock Market
January	-7.0%	-6.4%	-6.3%	-7.35
February	-1.2%	-2.4%	-0.8%	0.8%
March	7.8%	1.1%	6.8%	12.3%
1st Quarter, 2016	-1.0%	-7.7%	-0.7%	4.2%

Source:  The Wall Street Journal (Past performance is not indicative of future returns).  March 31, 2016

Oil rallies only to see another sell-off.  The price for a barrel of WTI Oil produced here in the US has fallen dramatically over the past couple of years.  However, after reaching a low of $30.76 on February 11^th, oil rallied nearly 34% to close on April 18^th at $41.14.  Since that high, oil has given back 11% of its value closing this past Friday at $36.79.  I believe oil prices have been influenced by rumors of production cap talks by some key producers and short-covering (traders buying oil to close out their negative bets) by oil speculators.  If most of the short covering has concluded, and demand fails to pick up dramatically, I do not see why this recent correction could not continue.  I believe it is hard to explain the volatility in oil prices without focusing on oil speculators.

US economy continues to slog along.  The final revision of the 4^th quarter, 2015 growth showed growth improved to an annualized rate of 1.4% beating consensus expectations.  The real Gross Domestic Product (GDP) in 2015 grew at 2.4%, the same rate as 2014.  I do not believe we will see much difference in real growth in 2016.

WHAT’S UP (or down) WITH THE US DOLLAR?

I look at the US Dollar (USD) as one of the key barometers of economic policy and underlying trends in markets.  The strength or weakness of the USD affects all of us every day and investors in particular.  When the USD is strong, sentiment in the US economy is generally high (can translate to higher interest rates), imported goods are cheaper, most commodities are cheaper, but US multi-national overseas earnings are diminished by currency conversions.  Individual investors can also lose some profits in international securities from currency conversions.  When the USD is weaker, these impacts are generally reversed.  Sentiment at home is lower (prospect of lower interest rates increases), US goods are more cheaper abroad, imported goods can cost more (increasing the prospects of inflation), commodities may be more expensive (again inflationary), and corporations and investors get can get boost in earnings from currency conversions.  These outcomes are part of why the change in value of the USD against other world currencies may be an important consideration when making investment decisions.

Examining today’s environment, the USD has strengthened against the Euro and other major foreign currencies.  During the bleak days of the US recession in 2008, the Euro cost $1.582 per USD.  As our economy stabilized and started to grow, the Euro also stabilized and traded in a range around $1.30 from September 2011 to September 2014.  The Euro began its steady decline in mid-2014 and that decline continued for over a year, stabilized at lower levels, and has begun to appreciate against the USD closing Friday at just over $1.13.

Understanding why the Euro declined and why it has started appreciating is helpful in understanding how the price level of the USD may influence investments.  I believe the key factor behind the decline of the Euro has been the expectation of rising interest rates here in the US.  The Federal Reserve (Fed) has been signaling higher rates to come, and over the past year or so, investors have been expecting rates to climb.  The small 0.25% increase in the overnight lending rate by the Fed last December appeared to confirm rate increase forecasts.  Interest rates in European countries, however, remain depressed and not expected to climb because of European Central Bank quantitative easing, poor investor sentiment, and low growth prospects.  I believe the nearly 5% rise in the Euro in the 1^st quarter is most probably attributable by the belief by investors that Fed Chair Janet Yellen is going to slow rate increases in 2016, not by prospects of international growth.  This sentiment about US interest rates is overwhelming currency traders who continue to watch the European Union (and other countries) push for more and more negative interest rates as part of their monetary policy.

It is too early to tell if a weaker USD is here to stay, however, it is very important for investors to pay close attention to this key indicator and understand the ramifications when changes occur. 

LOOKING AHEAD

I recently gave a presentation to a group in Northern Virginia about the outlook of the market over the near-term (rest of the year).  I am not big on making predictions, but I would like to share a couple of the key points I made.

1.         Recession remains unlikely.  Slow growth is not negative growth, and I believe our economy will continue to slog along.
2.           I believe risk and volatility remain in these markets.  March certainly helped ease investor losses for the year, but I would be very sensitive to your risk tolerances and the investments you have made.
3.          Even if the Fed raises rates 0.25% a couple more times this year, such small increases from low levels are probably not going to have a major negative impact on markets.
4.          Longer-term interest rates continue to confound economists and institutional traders.  The Fed raising rates in December was expected to cause rates to rise in longer-duration bonds.  This has not occurred.  Declining yields reflects, in my view, a combination of low expectations for economic growth and for inflation.
5.          Oil prices are likely to remain volatile, but I am not surprised by the recent pullback.  The Saudi’s are balking at any agreement in production caps, and without the Saudi’s leading the way, I believe the rest of the world will continue to pump away.
6.           Will the ebb and flow of oil prices remain correlated to the equity markets?  Too soon to tell.
7.           Jobs growth continues to be steady.  Another reason why I do not anticipate a recession.
8.           Earnings by corporations remains at very high levels, however, there has been little growth over the past four quarters.  The pundits are suggesting that earnings will improve in the second half of 2016.  I will be watching this topic closely.  I believe growing earnings is a key to a rising market.
9.            The US Presidential election is a wild card.  It is too early to call and even if I could, I do not think the outcome will have an impact on the markets until late fall, if any.

Looking at the D.A.L.I.^(R)                        provided by Dorsey Wright & Associates, US equities have climbed back into the #2 slot at the expense of the Money Market/Cash major asset category:

                       

Source: Dorsey Wright & Associates, as of April 1, 2016 Past performance is not indicative of future returns.

Remember, the D.A.L.I.^(R) is a very long-term investment indicator that I follow. 

Finally, I encourage everyone to look at their investments wherever they are and assess your risk tolerance within the framework of what the investment objectives you have laid out and decide if you are still consistent with those objectives.  If you are great, if not, make adjustments.

I am happy to help anyone who has questions so do not hesitate to pick up your phone and give me a call.

Paul L. Merritt, MBA, C(k)P^®, AIF^®, CRPC®

Principal

NTrust Wealth Management

P.S.  If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained.  Technical analysis is just one form of analysis.  You may also want to consider quantitative and fundamental analysis before making any investment decisions.

All indices are unmanaged and are not available for direct investment by the public.  Past performance is not indicative of future results.  The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index.  The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company.  The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX^® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.  The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.

Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.  The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities.  This index aims to provide a broadly diversified representation of commodity markets as an asset class.  The index represents 19 commodities, which are weighted to account for economic significance and market liquidity.  This index cannot be traded directly.  The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500^® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.

TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease.  Interest payments on inflation-protected debt securities can be unpredictable.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc.  The Euro is the predominant currency making up about 57% of the basket.

Currencies and futures generally are volatile and are not suitable for all investors.  Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. 

 The bullish percent indicator (BPI) is a market breath indicator.  The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group.  The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold.  The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.