Equity markets closed the quarter slightly positive but the path was anything but smooth, driven by ambiguity in economic growth, oil prices and interest rates. We are disappointed with our performance so far this year but are confident our process and the recent portfolio changes will get our portfolio back on track.

Within our equity portfolio, we were unable to avoid some pain as healthcare and financial holdings were down in the first quarter. The healthcare sector has been under pressure since July 2015 as political rhetoric from both parties intensified. Drug pricing became a visible topic after several pharmaceutical companies dramatically increased prices on some old drugs with little competition. Pharmaceutical, medical device and distribution companies also came under pressure as their customers, basically the insurance industry and service providers, consolidate further and gain greater pricing leverage. We reduced the healthcare exposure, but still have an overweight position to the sector as we expect it to benefit from new drug launches and medical device discoveries over the next few years and as valuations are now at a discount to the overall market.

Financial stocks also declined as investors focused on interest rate predictions, potential new regulation, modestly declining profit margins and exposure to energy loans that could potentially default or need to be worked out. Like their competition, the banks in your portfolio remain subject to the interest rate environment and will need to adjust to any regulatory changes. However, they do not hold any energy loans and are expected to increase earnings about 12% on average this year, attributes we hope to see reflected in their prices.

To be sure, there were several bright spots in the portfolio. Industrial stocks advanced as fears of a recession receded, oil prices stabilized and the US dollar weakened. In consumer discretionary names, lower energy and gasoline prices have allowed consumer spending on other goods, and continued job growth and associated wage increases have helped retail sales continue their upward trend. And we have stepped back into a small energy exposure after cutting it to zero last year.

As an active manager we go through periods of time where the portfolio returns trail market benchmarks. We are in one now and realize these spells are trying for managers and investors. We are investors in our strategy too and share our client’s frustration. Such times require patience and appropriate portfolio adjustments to improve performance. We asked for patience. Several changes have been implemented to reposition the portfolio for the environment we see ahead. As we reduced the healthcare exposure we increased our positions in technology, energy and industrial names, all of which have started off well. The effect of these changes will increase the overall earnings growth rate and further diversify our portfolio.

From an economic perspective, the U.S. economy continues to expand while the rest of the world is in the middle of a slowdown. U.S. GDP growth has been 2.4% each of the previous two years and something similar is forecast for 2016. Global data in January hinted that problems elsewhere might impact the U.S. negatively, prompting a downward readjustment for earnings expectations. We agree that our growth rate is uninspiring, is less than capacity, and probably won’t push higher without an increase in government spending or corporate investment. But the data doesn’t reconcile with recessionary fears. More than 600,000 jobs were created in the first quarter, which also means annual job growth is now running over 2%. Companies do not add to pay- roll if they fear a contraction in their own businesses. In addition, as a net import economy, the U.S. is benefitting from the decline in commodity prices and associated lower prices on most consumer goods.

The tone of oil-related news has finally shifted, reflecting the fluid dynamics of oil pricing and oversupply. After dropping 30% in 2015, oil found its bottom in February and recorded a small gain for the quarter. Demand is up 1% year over year, but increased demand should not be counted on to correct this oversupplied condition. Here in the U. S., we have seen production decline by 5% from peak levels last year, and we expect to see that pace accelerate into the 2nd half of this year. We must see broader output cuts to bring supply and demand into a better balance.

After raising interest rates last December for the first time in 10 years, FOMC forecasts showed an expectation of four more rate increases in 2016. Investors responded by driving longer rates lower. After several Fed governors reiterated their expectations in subsequent speeches, investors reacted, fleeing from risk, upsetting mar- kets worldwide and driving rates lower yet. Suitably chastened the FOMC retreated, taking no action at its January and March meetings, adopting a more dovish tone and suggesting two raises in 2016.

There was a time that the FOMC proudly viewed itself as a forward-looking institution. They probably still do. Their policy decisions were made in the context of economic forecasts 12-24 months into the future, be- cause monetary policy works with a lag. Through their actions, they now appear far more reactionary than preemptive, as if they have outsourced monetary policy to the financial markets. What will the rest of the year bring? Most likely is that the FOMC will put off as long as possible any further rate rises. Reasons will range from global stability concerns, to continued slack in the labor markets, to political unrest, to U.S. presidential elections, to breakage in the US-China currency exchange. Anything to defend a further delay so as to avoid upsetting markets.

We believe the FOMC is tying monetary policy too strongly to oil and the market effects of its changing price and an elevated correlation to pricing of unrelated assets. We think they should continue their path of raising rates in 2016 because the data, while it will never reflect a Goldilocks economy, is strong enough to warrant moving back towards normal. The lessons we draw from the experiences of central banks around the world is that cheap money alone won’t boost economic growth. It only serves to delay the hard work required for economic growth.