January 2016 Financial Markets Summary
As we noted last month, a casual observer would think not much happened with the stock and bond markets in 2015. With the exception of emerging market stocks and commodities, most ended the year not too far from where they started. The devil, as they say, is in the details. And the details tell us that things were anything but staid during much of the year. Looking at the numbers in the chart at the end of this letter, 2015 was not a pleasant year for investors. Real estate stocks were the only area with a gain, and only a tiny one at that. Everything else was flat to negative. While it was not a terrible year like 2000 or 2008, most investors are glad to see 2015 gone.
Volatility increased substantially during the last six months of the year, with daily swings of several hundred points on the Dow not an uncommon occurrence. The other major factor for the year was the on-again, off-again nature of the Fed’s interest rate stance. By the time the Fed actually moved rates higher a tiny bit in December, the event was met with a shrug. There were several other things that had an impact on markets in 2015. The U.S. dollar appreciated about 10% against most major currencies in 2015. The dollar can be a key factor in the performance of various investments, including the stocks of U.S. companies with sizable overseas revenues and foreign stocks and bonds. And, because commodities are priced in dollars, a higher dollar means lower commodity prices.
So what will 2016 bring? As we noted last year, for every positive economic note we can find a negative one. Employment numbers improved throughout 2015 and are near what the Fed has traditionally considered full employment. However, median household income is still below pre-recession levels. Interest rates are near historic lows, although expectations are that the Fed will boost rates 2-3 more times this year. While cheap energy is keeping inflation in check, a boost in wages that is just starting to be reflected in monthly reports could mean higher inflation and even higher interest rates.
With many bonds priced at premium levels, there is little investors can do to find yield that does not involve risk. We remain very cautious with fixed-income holdings and would probably avoid owning long-maturity corporate and government bonds. As for safety, there is little that fits the definition, except for cash and CDs. And we know what kind of yields to expect there.
Stratfor Global Intelligence writes a very interesting piece on the geopolitical impact of consumer electronics. “We cannot discount the possibility that consumer electronics will continue integrating into the heart of the global economic system. This means that companies such as Google, Facebook or even Baidu could become the most geopolitically important businesses going forward. This would not be unprecedented. For example, since Standard Oil’s emergence more than 100 years ago, oil companies have arguably been the most geopolitically important firms. Their dominance in the global economy is clearly waning, and we expect technology companies will take the place of today’s energy giants. Regardless, the long-term developments and cumulative changes the consumer electronics sector brings about are as geopolitically important as innovations in any other part of the economy.”
If we think about the big changes that will be coming to the world over the next 5-10 years, certainly technology and health care will be a significant part of those changes. Just think how those areas have grown in the last 5-10 years. We are reminded of a comment by Warren Buffet, “Be wary of clinging to a company because it has done well. You need to visualize what it is likely to do in the future.”
And geopolitics is not just about economics. It affects our perception and outlook in many ways. The potential volatility around the world has always been a concern for investors. The difference now is the instant-ness and incessant nature of 24/7 news. It surrounds us and is almost impossible to escape, and its market-driven, negative slant can cause investors to make rash and unwise decisions. If nothing else, it is much harder to be a glass half-full investor.
The narrowness of last year’s market is worth noting. A small number of stocks accounted for almost all the gain in the S&P 500, while the vast majority of stocks were down for the year. On a positive note, the U.S. consumer is starting 2016 in the best shape in years: unemployment is at a 7-year low, gasoline is cheap, interest rates are still low, and wages are beginning to rise. But we expect volatility to continue in 2016, amid likely higher interest rates. So, caution seems prudent.
Do not abandon your long-term investment strategy just because of a short-term disappointment. Patience is indeed a virtue, as shown below with highlighted 10-year returns for the Dow and the World Allocation. Note the diversified allocation achieved a return nearly as good, but with lower volatility. And remember our favorite comment, Today’s headlines and tomorrow’s reality are seldom the same.
|Asset Index Category||Category||Category||Category||10-Year|
|Dow Jones Industrials – Large Cos||-2.2%||7.0%||7.5%||4.9%|
|S&P 500 Index – Large Companies||-0.7%||6.4%||11.3%||5.0%|
|S&P 400 Index – Mid-Size Companies||-3.7%||2.1%||8.2%||8.1%|
|Russell 2000 Index – Small Companies||-5.7%||3.2%||3.5%||5.3%|
|MSCI EAFE Index – Developed Intl.||-3.3%||4.4%||-4.9%||0.2%|
|MSCI EM Index – Emerging Markets||-16.9%||0.3%||-4.6%||1.2%|
|Short-Term Domestic Bonds||0.1%||-0.4%||1.1%||2.8%|
|Global Government Bonds||-4.1%||-0.6%||1.7%||3.9%|
|Bloomberg Commodity Index||-24.6%||-10.5%||-24.4%||-6.4%|
|Dow Jones U.S. Real Estate||2.4%||7.2%||27.7%||6.2%|
|World Allocation Global stocks, bonds, commodities||-4.1%||1.5%||1.5%||4.4%|
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.