Market View (January 2016) Year in Review
REDW Wealth | January 19, 2016
Overview – Paul Madrid, CFA®, CFP®, AIF®
What a year for 2015! From seeing the first Triple Crown winner in 37 years to hitting all-time highs in the U.S. equity markets, the year marked some great and historic moments. One very notable moment that we can all relate to was the price of a gasoline at the pumps – we saw the price per gallon fall (and stay) below $2.00. Although low gasoline prices are great for us (the consumer), it did create some issues for the oil markets, many oil related companies and their employees, as well as state coffers. As a result, we saw the energy sector, along with a slowdown in China, have a negative effect on global markets. As these events began to unfold throughout the year, we saw volatility return to the markets as U.S. equity markets peaked in May and within a few months, we experienced our first equity market correction since 2011. Although the increased volatility didn’t make us feel good, it turns out the U.S. stock markets ended the year close to where they started. Because our portfolios are diversified, we had some other asset classes that fared better, and worse, than the U.S. stock market. Fixed income did its job and posted small positive returns to help balance the portfolio. However, with a strong dollar and slower global growth, commodities and emerging market equities posted declines for the year.
Equities – Daniel Yu, CFA®, AIF®
After a difficult third quarter, broad equity markets posted positive Fourth Quarter returns. However, flat to negative returns for the month of December blunted enthusiasm for the Fourth Quarter. For example, the S&P 500 had a total return of plus 7.04% for the Fourth Quarter, but a negative 1.58% return for the month of December. Other broad market indices did not fare as well. Throughout the year the price of oil and questions over China’s economic growth overshadowed positive economic releases in the U.S. The strengthening U.S. dollar also reduced the returns from foreign investments. These themes, combined with geopolitical unrest in the Middle East, has weighed heavily on global equity markets during the first weeks of 2016. Given the volatility of returns in 2015 and their continuation in 2016, we believe having and maintaining a broadly asset-allocated portfolio geared to your long-term goals best addresses the present situation.
Fixed Income – Clarence Hughes, CFP®
If we were to look at the yield of the 10-year U.S. Treasury bond at the end the 2015 at 2.27% and compare it to where we started the year at 2.19%, without taking a look at the market in between, we would conclude that 2015 was a very uneventful year for bonds. However nothing could have been further from the truth as geopolitical events, foreign market weakness and anticipation of the Federal Reserve (Fed) rate hikes joined forces to make for a wild ride for bondholders. 10-year U.S. Treasury bond yields rose as high as 2.48% and fell to as low as 1.65% during the year but despite the bond market’s fluctuations during 2015, U.S. government and corporate bonds largely managed to remain stable under the pressures of market and economic uncertainty.
The Fed did begin with a modest increase of 25 basis points (one quarter of one percent) to the Fed funds rate on Dec. 16, 2015. Some analysts believe this is evidence that the U.S. money and credit markets are returning to normalcy after seven years of historically low rates. This rate hike and potentially more to follow, bolsters the case that, despite the weakness in other developed and emerging economies, the U.S. is back on the road of sustainable growth. Although we interpret this as a positive, we also believe that the Fed’s future actions will result in continued bond market volatility through 2016 and further justify the need for a well-diversified portfolio.
Alternatives – Clarence Hughes, CFP®
Much like 2014, 2015 was a challenging year for commodity investors. Agricultural products, industrial and precious metals all saw significant losses. However, it was oil’s dramatic decline that received most of the attention. The Organization of Petroleum Exporting Countries (OPEC) indicated it would do little to rein in production which contributed to weakness in energy prices. Although it remains to be seen if we are nearing a bottom, there is some indication that with a stabilizing U.S. dollar and improving international growth, commodity prices could pleasantly surprise investors with a recovery in prices in 2016. Despite a very challenging environment, some managed futures funds performed reasonably well. The 361 Managed Futures Strategy Fund was slightly down -0.36% for the year, while the AQR Managed Futures Fund had a positive return of 2%.
On a brighter note, REIT total returns did generally outperform many major indices in 2015. The MSCI U.S. REIT index tallied a 2.52% return during the year despite ongoing fears of the Fed’s interest rate hike. Higher rates are a mixed blessing for REIT investors, as borrowing costs increase for operators and developers, but higher rates also mean higher rental rates and a potential increase in tenant quality. Should we see the gradual rate increases that the Fed has communicated, we would expect a positive year for REIT investors in 2016.
Conclusion – Paul Madrid, CFA®, CFP®, AIF® and Clarence Hughes, CFP®
As we begin 2016, we expect the market environment to be similar to 2015 – more volatility and global market uncertainty. Although these factors are unpleasant and cause us to feel uneasy, we must maintain our focus on the long term and accept that taking risk is the primary way to obtain sufficient returns to fund our goals. In fact, risk and return are related – the compensation for taking on higher levels of risk is the potential to earn greater returns.
After experiencing last year’s disappointing performance, most investors’ first reaction would be to radically change their portfolio allocation to chase “what was working”. However, remember that the purpose of our portfolios are long-term investments. Keep in mind that short term market conditions and a long term investment strategy don’t always mesh 100 percent of the time. Holding to a valid long-term strategy takes perspective and discipline and is what distinguishes the craft of investing from gambling. Unfortunately chasing hot performers and abandoning a sound plan in the face of market conditions, while tempting, leads more often to poorer results, higher fees and more headaches than riding out the storm and staying the course.
We believe we are back to a normal market environment where risk is more prevalent. Since we cannot control what happens in the market, we must focus on the things we can control. First, we must decide how much risk we’re willing to take. It’s probably a good time to reassess your risk tolerance to see if you are invested correctly. This leads to the next thing we can control – our portfolio allocation. This is the best way to control overall risk by diversifying across asset classes and minimizing total market risk. Fortunately, you have us to do the second part and find the best portfolio allocation with the least amount of risk. Now we just need to confirm that your risk tolerance is reflected in the way we manage your portfolio. If you are unsure, please reach out to your relationship manager and he/she will walk you through a series of questions to determine which portfolio allocation is best for you.
Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.