Happy New Year!
We are pleased to announce a change in the frequency of our updates for 2016 and a new format as well. We will start sending out a regular update twice monthly on or about the 15th of each month, as well as our month-end review and outlook on our about the first of the month. Our month-end update will once again include a book review covering a specific book one of us has read, and provide you with a quick synopsis in hopes of helping you decide if you would enjoy it for your own reading. This will be included in our January month-end newsletter. We also plan to provide articles that cover a wider scope of topics that we hope will be of interest to all of you on a regular basis. Our month-end review will also provide more specifics of our current outlook and strategies. We are very excited to kick off 2016 and continuing to serve all of you as we hope to take advantage of opportunities that arise as well as meet any challenges the New Year may bring.
NEW for 2016-“Family Billing” to Save You Money:
Effective with the first quarter, 2016 billing, we will group the total asset values for all our clients in an immediate family, which would include accounts owned by clients, spouses, joint accounts, adult children of clients and their spouses. This will result in the total of all asset values at the end of each calendar quarter within the “family group” and applying our asset management fees at the appropriate billing level for all accounts, regardless of the individual value on any one account. This “grouping” will apply to our internal billing calculation only. Account titles, ownership, and privacy will remain the same for each account. This method of calculating our fee should result in lower overall asset management fees due to the tiered nature of our fee arrangement. This is a result of our continued effort to provide you with the best possible service and lower your portfolio expenses when possible. In the past, adult children of clients and their spouses were billed based on the asset values of their own accounts. If you have any questions regarding this change, please do not hesitate to call.
It’s Time for Your Review:
With the close of 2015 and a new start for 2016, it is time for your personal financial review and update. This time of year is perfect to review your long-term financial plan, personal goals, and take inventory of where you are and where you want to go from here. Call us today to review your plan on our MyWealth system and let’s look at your specific options in accomplishing your goals.
The Markets:
In some respects, 2015 was a year that unfolded as we had expected – along with some surprises. The economy continued to plod ahead, the unemployment rate fell, and the Federal Reserve finally lifted the fed funds rate. The major U.S. stock indices traded mostly sideways, with a negative bias and saw increased volatility. For the year, the Dow Jones Industrial Average dropped 2.23% after producing positive returns in the fourth quarter, while the Standard & Poor’s 500 stock index ended 2015 off .73%. (MarketWatch) The S&P 500 Index lost ground for the first time since 2008, and stocks experienced their first 10%+ correction in four years, as measured by the S&P 500 Index (St. Louis Federal Reserve).
A Tale of Two Markets:
Even though the major stock indices did not reflect large losses, many “blue chip” stocks within the indices dropped by double digits. Within the 30 Dow stocks for example, Wal-Mart fell 28.6%, American Express dropped 25.2%, and Apple shares slid 4.6%. Even a defensive stock like Procter & Gamble was off 12.8% last year. Utility stock prices also dropped in 2015, with OG&E’s stock for example, giving up over 26% and American Electric Power off over 5%. (Google Finance) Exxon lost 15.7%, while Chevron gave up 19.8%. (DogsoftheDow.com) It turned out that the energy stocks in the Dow were not the worst performers in 2015, even with oil prices falling over 30%. West Texas Intermediate Crude oil closed 2015 at $37.07 per barrel, down from $53.27 at the start of last year. (CNBC, St. Louis Federal Reserve) Even Warren Buffet’s performance, as measured by the price of Berkshire Hathaway Class A stock, lost 12.48% last year. (Morningstar.com)
Interest rates rose overall in 2015, with the yield for the 10 year U.S. Treasury ending 2015 at 2.27% compared with 2.17% at the beginning of the year. (U.S. Treasury) The average rate for a 30 year fixed mortgage stood at 3.91% on 12/31/15, while the 15-year rate was 3.11%. Rates are also expected to inch higher in 2016. (Bankrate.com)
We also witnessed the tale of two economies: service industries expanded at a modest pace, but falling exports (U.S. Census) and huge cutbacks in the energy sector took a toll on manufacturers. Meanwhile, the relative outperformance of the U.S. economy versus its global partners kept upward pressure on the dollar.
A Look Ahead at 2016:
Predicting the future is always fraught with peril. No one has a crystal ball, period. Many may site the upcoming election as having an influence on stock market direction, however, fifty years of data compiled by Deutsche Bank suggest an election in and of itself does not provide much net effect on stocks overall.
The equity markets performance will still depend on the economy and corporate profits. However, issues that held sway in 2015 could continue to influence market sentiment including earnings, the global economy, the dollar, and low commodity prices.
1-Earnings – It’s the lifeblood of stocks and the biggest driver of the medium and long-term direction of equities. Using monthly data going back to 1923 (Robert Shiller, PhD, Yale.edu), there is a 96% correlation between S&P 500 earnings and the S&P 500 Index. That’s an extremely close correlation where 100% would mean the two variables move in lockstep.
Thanks in large part to the steep drop in oil prices, profits at energy-related firms took a huge tumble last year (Thomson Reuters). In turn, that created big headwinds to overall corporate profits – see Figure 1 above. In fact, third quarter, 2015 earnings, which were down a scant 0.8% from a year ago, would have been about seven percentage points higher if energy had been excluded according to FactSet Research.
Note that analysts are expecting earnings to turn positive in the first quarter of 2016 and accelerate as the year progresses. Modest growth in profits would likely create a tailwind for stocks, but much of the pick-up is based on a continuation of the economic expansion, a bottom in oil prices, and greater stability in the dollar. Most analysts don’t anticipate a recession in the near term, but the direction of the dollar and oil is a bit fuzzier. Still, the forecast for rising profits is cautiously encouraging.
2-Too much oil, commodities and the dollar – Low commodity prices have been a benefit to nearly everyone outside of the energy industry. However, woes in the commodity sector have hurt emerging market economies, and companies in the mining industry. Much of the drop in commodity prices can be pinned on China, which is undergoing a transformation from an economy that is reliant on its industrial sector to one that is more balanced between consumer/service needs and goods producers.
Consequently, China’s voracious appetite for raw materials has slowed, sending prices down to the lowest level in over a decade – see Figure 2. Another factor that influences commodities is the dollar. The reason – most commodities that are sold around the globe are priced in dollars, which means a rising U.S. currency puts downward pressure on prices. It’s a plus for consumers but it hurts producers.
While many of us are being treated to the lowest prices at the pump in years, weakness in energy has forced sizable layoffs among oil producers and big cutbacks in capital spending (U.S. Bureau of Labor Statistics).
Looking ahead, what happens to China and the dollar will likely have an influence on the commodity sector this year. But what occurs in the U.S. oil fields will also play a role. Greater stability would lessen the uncertainty for investors. However, trends in commodities, including oil, tend to move in long-term cycles.
3-Problems have emerged in high-yield debt, commonly called junk bonds. Thanks in large part to woes in the mining and energy sectors, yields on junk bonds have risen as investors have bailed out of low-grade energy and mining debt (bond prices and yields move in opposite directions).
Moreover, the riskiest bonds, or those with the lowest credit quality, have seen the largest jump in bond yields – therefore a decline in bond values. In less than a year, yields with a ‘CCC’ rating have more than doubled, and the difference in yield between higher quality junk debt (BB) and lower quality junk (CCC) has widened significantly. Rattle the bond market and you can rattle the stock market. Yet, measures of credit conditions used by the Federal Reserve indicate financial stresses in the economy remain muted entering the New Year (St. Louis Federal Reserve).
If oil and the commodity sector begin to bottom and the economy continues to expand at a modest pace, historical analysis suggests that much of the damage in junk bonds is probably behind us. While the jury it still out, a Federal Reserve that encouraged very low interest rates, which in turn, also encouraged a reach for yield by investors, may have created too much enthusiasm for high-yield debt over the last couple of years
Additional issues-
The most likely path in 2016 probably bears plenty of resemblance to 2015 – a modest but less than impressive economic expansion that lends support to corporate profits. If oil prices do stabilize, this could aid the high yield bond market moving forward. If not, we could see additional corporate failures in the oil and gas industry as well as potential mergers/acquisitions.
Don’t forget, however, that peering into the future is an educated guess at best. What happens with Europe, Greece, China, the Federal Reserve, and geopolitical instability can cause temporary shifts in short term sentiment. Then there are the unanticipated events that could hinder or fuel gains this year.
Ultimately, the domestic economy has the biggest impact on markets. Even events tied to terrorism rarely have a long-term influence on stocks. Following the tragedy of 9-11, the S&P 500 Index fell nearly 12% in the first 5 trading days, but had completely erased losses by October 11, 2001 (St. Louis Federal Reserve). 2016 will most likely provide its share of challenges as well as opportunities as does every year, and we are here to work with you in preparing, monitoring, and making adjustments as warranted to your personal long-term plan.
We hope you all had a very blessed Holiday Season, and we are looking forward to working together in the years to come. Please be sure to call us today to schedule your personal review and financial planning session on our MyWealth system. If you have any additional questions or concerns, please don’t hesitate to call or email us at any time.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
Looming Risks Overlooked