2015: A Year of Investment Volatility

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Welcome back from the holidays! We hope you had memorable times, or, perhaps even better, peaceful times. 

Now to turn to a more challenging topic: our volatile investment markets of 2015. 

As of December 31, 2015, the largest 500 stocks in the U.S. as measured by the S&P 500, seemed to be telling investors a story about resiliency. Despite headline news, geopolitical and global economic concerns – particularly among China and emerging markets – as well as a challenging domestic market environment, the benchmark S&P 500 basically ended the year right where it started. Some other broad measures of equities (stocks) were slightly more negative. And, many types of bond returns were generally modestly positive to negative.

Slightly negative results as of year-end may appear fairly attractive compared to one of the key occurrences in 2015: our first equity correction since 2011. As an example, the Dow Jones Industrial Average fell -14% from May to August – from 18,300 to 15,700 – before ending the year at about 17,400. As you know from our past communications, we’ve long expected this correction, and even see it as a positive as we look forward, in terms of bringing valuations back to a level that is more realistic. 

Another key event in 2015 was the Federal Reserve Board finally raising interest rates. Going into 2016, a concern for some is continuing interest rate hikes. Dr. Scott Brown, Economist for Raymond James Financial, notes that Federal Reserve officials are signaling an expectation of four rate hikes over the course of the year, one per quarter (with the flexibility to move more slowly if conditions warrant). Will these interest rate hikes depress 2016 equity markets? Interestingly, long-term data suggests that the equity markets tend to rise during the first half of an interest rising cycle, depending on world and other conditions. Additionally, given the mild returns on bonds in 2015, our outlook is that many types of bonds have already “priced in” modest increases in interest rates. 

Of course, as we look to 2016, we recognize the serious geopolitical challenges. Just yesterday, January 4th, 2016, the headline news included Saudi Arabia’s further rift with its chief rival in the Middle East, Iran. Additionally, China’s economic slow down continues to impact the world, especially emerging markets such as Brazil and Peru which export natural resources to China. But, potential positives continue as well: a “corrected” market at more attractive valuations, a healthier labor market, low interest rates, and continued increases in consumer spending and a housing expansion. 

Over the next few days, we’ll be providing you an in-depth look at your 2015 portfolio results and our outlook. But, we thought we might value a quick overview now. As you know, as we work together on your short- and long-term financial plan, we take into account good markets and volatile ones. Our goal is to leverage the investment markets as a tool in helping you meet your goals. 

As always, please provide us your thoughts. And, a happy new year to you.

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The S&P 500 is an unmanaged index of 500 widely held stocks.

The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index (which represents approximately 98% of the investable US equity market.)

The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns.

The Barclays Aggregate Bond Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.