Does anyone remember how this year started in the financial markets? We began 2016 with a sharp downturn in oil and stocks – indeed it was the worst start to a calendar year that the S&P 500 has ever had. Not only have we recovered from those lows (the S&P 500 closed at 1,829 on February 11, and at 2,168 on September 30), but we have seen many sectors on both the stock and bond side post positive returns through the end of the third quarter.
The summer had relatively low volatility, which kept the domestic stock market range-bound. Volatility picked up in September, but not to the level that some media pundits predicted. While it is possible that volatility increases again as we approach the election, getting beyond the election should be good for the market. As we all know, financial markets dislike uncertainty more than anything, so knowing the next Presidential and Congressional combination will provide clarity on some key assumptions for the outlook for both stocks and bonds, and will vary by sector.
I anticipate that the Fed will continue to be a source of discussion, hand-wringing, and frustration for market watchers. The Fed has two more meetings in 2016. The November meeting is just prior to the election, and there is wide agreement that no changes will be made to their policy stance at that time. The December meeting is targeted as an opportunity for the Fed to raise rates, but I will be surprised if they are bold enough to follow through with it. Since the Fed has been so slow and drawn out in their process to increase rates, we do not currently have concerns about the negative effect that a rate increase could have.
Central banks around the globe continue to provide “easy money” policies to their regions to spur growth, and it still is not working en masse. While I do not believe that the stock market is going to slide into a 2008 style downturn, I continue to believe that the current economic policies and demographic trends will cause returns to be lower than investors have grown accustomed to, and that the job of managing risk has become even more important.
We recently rebalanced our portfolios, and our primary allocation shift was to reduce international holdings. While we believe that a properly diversified portfolio should include a global allocation, the risk in many countries outside of the US has increased over the past 12-24 months. Whether we are discussing Britain’s EU Brexit process, negative interest rate policy (NIRP) in Japan and other developed countries, or immigration challenges around the globe, there are many factors that may dampen growth in international markets. Despite the trials we have domestically, we believe that our country has the greatest growth potential in today’s market and therefore have a positive view of our markets for the near-term.
Investing involves risk including the potential loss of principal. No investment strategy, including diversification, can guarantee a profit or protect against loss. Indexes are unmanaged, and cannot be invested in directly. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. This presentation may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions; however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market. This information is not intended to be a substitute for specific individualized planning advice. The information presented here should only be relied upon when coordinated with individual professional advice.