Predicting the erratic is a practice that leaves much to be desired. A great deal of unexpected circumstances unfolded in 2016 that ultimately led to a desirable outcome for diversified portfolios. We started 2016 with enormous volatility and headwinds. With the S&P 500 shedding nearly 11% in the first 6 weeks of the year (1). This sell off was driven primarily by concerns over the effect of lower oil prices on the economy.
Patient investors that did not panic during this early year sell off were rewarded however as the market proved to be resilient with the S&P 500 gaining over 15.54% from February 12th until the Brexit vote on June 23rd (2). As you may recall Great Britain shocked the world in late June with a vote to leave the European Union. This caused an immediate and dramatic albeit short term sell off.
Following the Brexit vote markets stabilized a bit with the headlines turning to the U.S. political landscape. Dotted throughout the drama of this year’s political campaign markets were graced with some optimistic economic data. Throughout the year, we saw unemployment shrink, wages grow, and ultimately the economy continue to show signs of growth. These positive factors helped buoy markets as we saw the Dow reach record highs in July and August (3). Following the surprising election of Donald Trump in November we have seen a combination of positive and negative market reactions.
Despite a variety of unlikely circumstances coming to fruition in 2016 major market indexes posted positive returns ranging from ample to meager.
|S&P 500 (Large Cap US)||11.96%|
|Russell 2000 (Small Cap)||21.31%|
|MSCI EAFE NR (International Developed)||1.00%|
|MSCI EM NR (Emerging Markets)||11.19%|
|Barglays US Agg Bond TR (Bonds)||2.65%|
|Alerian MLP TR (Energy)||18.31%|
As we look forward to 2017 we are cautiously optimistic. The post great recession bull market is now nearly 7 years old. We view stocks as not particularly expensive however, they not necessarily cheap either. This scenario means that we need to see consistent economic improvement for this bull market to continue to age. If we see the new administration enact certain sound economic proposals such as corporate tax reform, repatriation of overseas earnings, and mild deregulation this could provide the nutrition needed for continued growth. If policies can have a positive impact we also must admit that economic policies can also have unintended negative effects as well (trade wars, labor disputes, budget concerns). Despite these concerns, we retain our cautious optimism about the stock market. We maintain our belief that global diversification across multiple asset classes is a sound strategy. We currently see international markets as less expensive than domestic markets and despite certain short term head winds that there are excellent long term opportunities to be found.
Bond markets are of particular interest going into 2017. As you may be aware most bonds will typically have an inverse relationship with interest rates. This is to say that if interest rates rise the value of bonds will fall. You may also be aware that we are in a (slowly) rising interest rate environment. With the Federal Reserve announcing a modest interest rate hike of .25% on December 14th (4) you may ask yourself why should I own bonds? Although we admit that bonds can face pressure during a rising interest rate environment if used properly they can act as a tool to reduce volatility in a portfolio. For example, in 2008 when the S&P 500 lost 37%, bonds helped relieve some of the pain by finishing 2008 up 5.7% (5). This diversification element is why when we analyze an investment in a portfolio we look at it as a component of the portfolio not as a standalone investment.
In addition to utilizing the diversification elements of international stocks and bonds we maintain that alternatives such as real estate and precious metals among other strategies can play a significant role in both the long-term performance and in the risk of a portfolio. It’s important to remember in years like 2016 where the headlines are filled with positive news of the Dow breaking records and reaching mile stones that it was not that long ago the headlines relayed a very different message. It was just 8 short years ago near the end of 2008 when we were inundated with news of major financial institutions going bankrupt and the global economy on the brink of collapse. This is the reason that risk is always at the forefront of our recommendations and we maintain our philosophy of globally diversified portfolios weighted towards each asset class based on your time frame, appetite and ability to take risk.
FSG Special Announcement
Recently our very own Brice Carter had an article featured in Forbes. Brice has been a Wealth Adviser with Financial Strategies Group since 2011. In 2013 he became one of the youngest individuals in the country to become a Certified Financial Planner™ and has gone on to complete his ChFC® and CIMA™ designations. The article is titled Is Your Portfolio Overworked and you may read it here. Is Your Portfolio Overworked?
- http://us.spindices.com/indices/equity/sp-500 ; http://us.spindices.com/indices/fixed-income/sp-us-aggregate-bond-index
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.