After the markets muddled along in 2015, investors greeted 2016 with similar pessimism. Through February 11th, the S&P 500 had fallen over 10.5%. The same tired refrains dominated the headlines, which featured China, emerging market weakness, and low oil prices. These factors were also blamed for causing the market’s declines in the fourth quarter of 2014 and the second half of 2015.

Concurrently, the debt markets showed signs of deterioration beyond the expected weakness in energy. In January, Standard and Poor’s outlook for corporate borrowers was the worst it had been since the financial crisis. The debt market challenges would have been exacerbated had the Federal Reserve followed last year’s rate increase with another. However, rates were held steady at the January and March meetings. Furthermore, healthy bank earnings allayed these fears as banking leaders suggested credit fears were overblown. JP Morgan CEO Jamie Dimon confirmed that the core of its banking business was “pristine” and that “consumers are in increasingly good shape.” Alongside these developments, the market recovered through the end of the quarter.

After a year of campaigning by candidates on both the Republican and Democratic sides, the races to the nomination accelerated in February with the Iowa caucuses. Abhorring uncertainty, the markets feared that extreme candidates on both sides of the aisle could pose a threat to the U.S. economy. The Wall Street Journal conducted a survey of economists asking how each candidate would affect their economic forecasts for 2017. The antiestablishment candidates, Bernie Sanders on the Democratic side and Donald Trump on the Republican side, were predicted to have the most negative impacts on the economy. More concerning is that with over half of the delegates pledged, the nominees for the 2016 election are still undetermined. The outcomes are less certain at this late stage compared to any election in the past 25 years.

On the Republican side, there is an increasing chance that front-runner Donald Trump will not be able to obtain the necessary delegates to secure the nomination before the Republican Convention in July. This would result in a brokered convention, which consists of at least two rounds of voting. In the initial vote, most of the delegates are required to vote consistent with their state’s primary or caucus results. If no candidate receives the necessary 1,237 (50% + 1) votes of the 2,472 delegates, a second round of balloting ensues. Depending on the state, during the second and any subsequent rounds, delegates are allowed to vote however they want, resulting in side deals and bargaining for delegate votes.

Brokered conventions are rare in the post-WWII modern era. The last truly brokered convention occurred in 1952. In the absence of a candidate of their choosing, the Republican establishment would prefer a brokered convention. However, this could lead to a lack of unified support in the party, and might ultimately lead to a third party candidate and/or the nomination of a nonviable Republican candidate.

As Hillary Clinton collects delegates at a consistent clip and the Republican Party turmoil continues, the markets have begun to discount a victory for the Democrats in November. Beneath the political headlines and concerns about economies abroad, the domestic numbers showed signs of strength. Americans bought a record 17.5 million cars in 2015, fueled by low gasoline prices, loosening credit, and improvements in the labor market. The employment statistics have been particularly encouraging, outstripping expectations. U.S. nonfarm payrolls growth has inched up, growing 2.3% over last year. More employment opportunities, higher pay for those opportunities, and reduction in household expenses due to lower gas prices all lead to more robust U.S. consumer spending power. That is good news for the stock market.

However, questions remain about the health of the labor market. Alternative work arrangements have grown significantly, which may be inflating the job numbers. Many analysts have attributed the growth in the “gig economy” to the Uber-style mobile application-generated jobs, but a recent study by Alan Krueger at Princeton and Lawrence Katz at Harvard suggests that most of the growth in these jobs has happened offline. The study indicates that traditional industries like manufacturing, healthcare, education, and public administration have experienced double digit growth rates in the number of workers with alternative work arrangements. Workers with these types of jobs are counted in the labor statistics, but they do not enjoy the benefits of a predictable work schedule, health insurance, social security or a retirement plan. Without these benefits and the safety net they provide, consumers may remain reluctant to increase spending.

Buoyed by corporate earnings and employment data, the stock market recovered from its 10% decline in the first half of the quarter to end the quarter up just over 1%. We are encouraged by this resilience and we believe contributions from the broader corporate sector and a strengthening consumer will outweigh the continued pressure from the energy sector. Global conditions will be the wild card. We will watch for developments leading up to the United Kingdom’s June referendum on whether or not it should exit from the EU, a so-called “Brexit,” which would disrupt its cross-border commerce. The market has remained pessimistic thus far due to growth deceleration in China, but if we begin to see stabilization or an acceleration of growth, this would be a positive market event that would lead to higher demand for commodities and an overall increase in inflation.

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