May 2016 Financial Markets Summary

In a recent presentation to some of the top RIA firms in the country, noted economist Austan Goolsbee asked how the Fed has managed to be so wrong on its economic outlook for the past six years, particularly the last two.  “Every quarter they talk about 2-3% expected GDP growth one year from now.  They are never right, but they always come up with a reason.”  When asked about an expected increase in interest rates, Goolsbee quipped “No way the Fed will raise rates twice in 2016.  Maybe once, but only then because they think the public expects it.”  He believes the slow economy will eventually grind its way upward, spurred on by corporate innovation and the productive capacity of the American worker.  The speech was just part of a three-day session that also included former ambassador to China, John Huntsman; global expert and best-selling author Ian Bremmer; and former British Prime Minister Tony Blair, among many others.  Consider the following takeaways:

From Ian Bremmer, “OPEC is over, killed by technology.  Its influence is quickly waning.”  And, even more thought-provoking, “Technology is taking away jobs, so expect a period of very unstable geopolitics in many emerging economies and developed countries where tech is a low priority. Low-skilled labor will be replaced by technology/automation.”  From John Huntsman, “The world is at a big inflection point, similar to 1919, when post-WWI politicians made some disastrous decisions.  Let’s hope this time will be more like 1945, when post-WWII policies proved to be positive.  There is one country that is critical for the U.S. to understand, and that is China.”  From David Kelly, JPMorgan Chief Global Strategist, “Economic expansions do not die of old age.  They are assassinated.  1.4% is the average growth of the economy the last seven years.  We are not on the brink of recession…it’s just the way it is, an OK economy, a healthy tortoise.”

The last three months saw an impressive turnaround for most of the world’s stock markets, with the Dow and the S&P 500 now in positive territory for the year to-date.  But the biggest gainers, emerging market stocks and commodities/energy, are the result of the huge rebound in oil prices and the drop in the dollar.  There is a general agreement that oil was way oversold at $26 and that the current $40-$45 price is more reasonable.  Another rather significant change has been the retreat in the value of the U.S. dollar.  This has helped other economies and should be a boon to large U.S. corporations dependent on exports to other countries.  The dollar has lost between 5% and 12% against most world currencies.  Diversification is working once again.

Asset Index Category Category Category Category 10-Year
3 Months 2016 YTD 2015 Average
Dow Jones Industrials – Large Cos 7.9% 2.0% -2.2% 4.5%
S&P 500 Index – Large Companies 6.4% 1.0% -0.7% 4.6%
S&P 400 Index – Mid-Size Companies 10.9% 4.5% -3.7% 6.2%
Russell 2000 Index – Small Companies 9.2% -0.4% -5.7% 4.0%
MSCI EAFE Index – Developed Intl. 6.4% -1.3% -3.3% -1.2%
MSCI EM Index – Emerging Markets 13.6% 6.2% -16.4% 2.3%
Short-Term Domestic Bonds 1.2% 1.4% 0.2% 2.9%
Multi-Sector Bonds 1.3% 2.5% -2.1% 1.1%
Global Government Bonds 5.5% 5.6% -3.9% 4.3%
Bloomberg Commodity Index 10.8% 8.9% -24.6% -6.0%
Dow Jones U.S. Real Estate 7.7% 3.4% 2.1% 5.5%
World Allocation Global stocks, bonds, commodities 5.9%  2.5% -4.4% 4.1%


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