First quarter equity market performance was clearly a tale of two halves. Fear dominated the first half of the quarter as U.S. economic activity slowed and investors worried about a more painful downturn ahead. Indeed, after nearly seven years of modest but uninspiring economic growth in the U.S., some people naively observed that a recession was “overdue.” Between the seemingly endless freefall of oil prices, heightened warnings from a sharp selloff in high-yield bonds, and ongoing weakness in overseas economies, there was plenty to be worried about. Some observers even compared the state of the economy to early 2008, just before the S&P 500 collapsed by more than 50%. No doubt this kind of talk did little to instill confidence in the investing public.

However, by mid-February, things started to turn around. The tone of U.S. economic data began to improve, oil prices staged a sharp rebound off the lows in the mid-$20s, and credit spreads began to tighten. Over the course of the next few weeks, the stock market recovered nearly all of the 10.3% loss sustained up to that point. After all the bouncing around, the S&P 500 finished the quarter with a nominal gain of 1.4%.

For the first time in a while, the MSCI Emerging Markets Index outperformed the U.S., jumping 5.7% in the quarter. A large part of the story was the sharp rebound in Brazilian equities, which make up 5.7% of the Index and soared 28.5% in the quarter, despite high inflation, negative GDP growth, and a huge corruption scandal at the highest levels of government. The MSCI EAFE Index of developed market stocks continued to flounder, falling 3.0%. Japan was especially soft, as attempts by the government to weaken the yen by forcing bond yields into negative territory had the opposite effect.

U.S. high-yield bonds followed a similar path as equities, recovering early quarter losses to finish with a gain of over 3%. Taxable investment-grade bonds posted a gain of 3.5%, while tax-exempt issues rose by 1.7% in the quarter, benefiting from the Fed’s reduced expectations about the pace of rate hikes in 2016.

Despite all the doom and gloom expressed at the early part of the year, we felt at that time (and we continue to believe) that the likelihood of a U.S. recession in 2016 was quite low. Severe bear markets are usually accompanied by economic recessions, but we were encouraged by the fact that few of the normal recession signals were flashing caution. Initial unemployment claims remained at multi-year lows, indicating that the job market remained healthy. Recessions are often preceded by a spike in oil prices, not a 75% decline as we had just experienced. And importantly, despite the Fed’s first rate hike in December, monetary policy is likely to remain quite supportive of economic growth for some time to come.

Now that U.S. stocks have recovered their 2016 losses and recession fears have at least temporarily subsided, further stock market gains are likely to be dependent on a rebound in earnings growth. Unfortunately, S&P 500 earnings have been falling on a year-over-year basis for the last several quarters, and first quarter results are expected to continue this trend. Clearly, companies are having trouble growing earnings in the face of weak overseas economies and rising wage pressures here at home as the job market tightens. We believe earnings growth will resume in the latter part of 2016, but gains are likely to be modest. As a result, we expect only mid-single digit returns for the broad market averages this year. In our view, successful equity investing going forward will require: 1) a focus on those companies that can deliver above-average earnings growth, 2) a discerning eye on price, and 3) lots of patience.

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Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of June 2007 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

The Barclays Aggregate Bond Index is comprises U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

The Barclays U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured, and pre-refunded bonds.

The Barclays U.S. Municipal High Yield Index measures the non-investment grade and non-rated U.S. dollar-denominated, fixed rate, tax-exempt bond market within the 50 United States and four other qualifying regions (Washington, DC, Puerto Rico, Guam and the Virgin Islands).

The Wall Street Journal Dollar Index (WSJ Dollar Index) is an index (or measure) of the value of the U.S. dollar relative to 16 foreign currencies.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.