December 2015 Financial Markets Summary
We were discussing the year’s markets with a colleague recently. A common observation was that if an investor only looked at the markets in January and again at the end of November (see the year to-date numbers below), the conclusion would be that things were pretty boring and that not much happened. Reality is quite different. Large cap stocks were down at least 12% in the third quarter, while smaller company stocks and foreign stocks have had an even wilder ride. But we remind investors that the increased volatility this year is still below average, since typical intra-year declines for the S&P 500 average more than 14%. So why all the moaning and doom-and-glooming from most of the electronic media? Could it be the expected hike in short-term interest rates?
The economic dominos are falling into place for the Fed to finally raise interest rates for the first time in nine years. Those dominos include improving Chinese economic numbers, higher inflation statistics, ever-improving employment data, and a strong third-quarter GDP report. If history is any guide, the expected quarter-point increase should not have a negative impact on the economy. As economist Philip Orlando notes, “Once investors come to that realization, we believe stocks should zip higher.” But what about the recession that is “for certain in the next year” according to a CNBC anchor? Strategas Research, a highly-respected company, says “there is no economic model in which a recession is likely after a period in which oil prices have dropped 60%.” Let’s try to hold on to that statistic!
Overseas, particularly in Europe, the focus has been on recent terrorist attacks. There has been some thought that the affected economies might benefit as efforts to combat terrorism lead to more quantitative easing and defense spending. But surely something must be done about the horrendous employment statistics for young Europeans. It is a shocking 40% in Belgium, which has become a key ISIS pipeline.
To be sure, there is a lot of nervousness. But despite this, consumer sentiment has moved higher. Does that mean we should break out the eggnog? Probably not. The narrowness of this year’s market is worth noting. The 10 largest stocks in the S&P 500 are up an astounding 13.9% through November 20, while the rest are down 5.8%. Caution is surely indicated. We remind investors that volatility is something we must accept, unless we are able and willing to receive after-tax-and-inflation negative returns from bank deposits and CDs. Match your risk profile and long-term goals to a diversified allocation target, and then hang on. Do not abandon your strategy just because of a short-term disappointment. Patience is indeed a virtue with investing, as shown below with highlighted 10-year returns for the Dow and the World Allocation. The diversified allocation achieved a return nearly as good, but with lower volatility. And remember, Today’s headlines and tomorrow’s reality are seldom the same.
|Asset Index Category||Category||Category||Category||10-Year|
|2015 To-Date||3 Months||2014||Average|
|Dow Jones Industrials – Large Cos||-0.6%||7.2%||7.5%||5.1%|
|S&P 500 Index – Large Companies||1.0%||5.5%||11.3%||5.2%|
|S&P 400 Index – Mid-Size Companies||0.6%||3.2%||8.2%||7.1%|
|Russell 2000 Index – Small Companies||-0.6%||3.3%||3.5%||5.9%|
|MSCI EAFE Index – Developed Intl.||-1.9%||0.2%||-4.9%||0.9%|
|MSCI EM Index – Emerging Markets||-14.9%||-0.5%||-4.6%||2.0%|
|Short-Term Domestic Bonds||0.6%||0.0%||1.1%||2.9%|
|Global Government Bonds||-3.5%||-0.5%||1.7%||4.0%|
|Bloomberg Commodity Index||-22.3%||-10.8%||-24.4%||-5.8%|
|Dow Jones U.S. Real Estate||1.0%||7.8%||27.7%||6.1%|
|World Allocation Global stocks, bonds, commodities||-2.4%||0.8%||1.5%||4.7%|
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only. Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy. It is provided with the understanding that no fiduciary relationship exists because of this report. Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice. PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice. If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives. All rights reserved.