Market Update February 2016
Encouraging News Yet Depressing Results
Feeling blue, but why? The American Association of Individual Investors performs a weekly poll of members assessing their market expectations over a six-month horizon. For the week ending January 14th, only 17.9% of those surveyed categorized themselves as “bulls,” the lowest such percentage in over a decade. Throughout the depths of the Great Recession and the darkest days of the European debt crisis, a greater number of respondents found reason to be hopeful than was the case in this past month. We find that enormously perplexing – and encouraging.
There is no hiding from the fact that in the month of January markets experienced one of the worst starts to a year in recent memory. The S&P 500 index experienced its single worst opening week in history before recovering slightly to finish the month down 4.96%. The current roster of concerns contributing to the recent selloff consist of a “hard landing” in China (we’ve yet to determine just what qualifies as a hard landing), fallout from collapsing energy prices, a debt overhang and related concerns around bond market liquidity, tightening of monetary policy, and the impact of a strong dollar. While there is at least a kernel of truth to each of these, we are of the belief that many of these worries are being significantly exaggerated. Regardless, investors, as a group, have not liked what they see and they’ve taken stock and some corporate bond pricing down sharply in response.
Ultimately, yes there is several concerns that investors face however there is rarely a time when investors are not facing concerns. What we find particularly interesting is that despite the sell off as of late the majority of data and news pertaining to the economy paint a positive picture. The great American jobs machine continues to crank out new opportunities; signs of wage growth are ubiquitous; home prices are pushing steadily higher; debt servicing costs are at multi-decade lows even as consumer loans outstanding are growing; inexpensive gasoline, heating fuels, and imported goods leave a larger percent of the U.S. wallet available to discretionary spending; and confidence readings amongst both households and businesses are at normal levels, neither elevated nor depressed. These are all indications of a healthy and growing economy that will be supportive of corporate earnings. This outlook, together with the fact that the poor performance of corporate bonds and equities in recent months has produced better valuations, makes us keener on holding risky assets today, not less. And hence our confusion as to why a gloom and doom mentality is so prevalent.
“The market is the most efficient mechanism anywhere in the world of transferring wealth from impatient people to patient people” -Warren Buffett
At FSG we unsurprisingly maintain our view that diversification and patience pay off in the long run. Diversification across asset classes may not be the most exciting investment strategy but it is the only strategy that has been proven time and time again to work. It would be mathematically impossible for the best/worst performing mutual fund in any given year to out-perform the best/worst performing single stock due to diversification; as you layer more and more stocks in a mutual fund the return of each stock has a proportionally smaller effect on the return of the mutual fund. Thus the law and goal of diversification goes into effect. A diversified portfolio consisting of multiple asset classes (large cap stocks, small cap stocks, bonds etc.) will never outperform the single best asset class in a year nor will it underperform the worst performing asset classes during times of turbulence similar to what we have seen as of late. This is why we are very optimistically maintaining our disciplined investment philosophy of diversifying among multiple asset classes with a long term goal oriented focus.
We would like to congratulate our very own Ronald Thompson II and his wife Kristy, on their newest addition. They had a son, Tye Stephen Thompson, on January 24th at 5:13am. He is 9lbs 2oz and 20.5 in long. Both Kristy and Tye are doing great, congrats to the Thompsons!
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