Fourth Quarter Market Commentary
“I can’t take much more it this!” We know this is the common sentiment shared by many investors at this point. The volatility that started in the second quarter and worsened in the third quarter continued through the fourth quarter then made a dramatic jump to start 2016, making it the worst first week of a calendar year on record. The frustrations that grew over the last year are leading many investors to want to throw in the towel. We understand these feelings – they are normal and natural.
We also know from history how detrimental these emotions and the natural responses are to investors, causing them to make the wrong decision at the wrong time, which normally leads to missing out on much of the returns offered by good investments. In fact, investment analysts consider the massive outflow of money from stocks over the last few months to be a positive future indicator for stocks because of the poor track record of market timers.
I have been managing investment for about 18 years now and have seen this type of environment several times. It is scary! It is disheartening! It is downright depressing! Those feelings are normal – I have them too. I lose sleep…a lot of it, so you don’t have to. But the key to successful investing is to ignore those feelings; don’t make decisions based on market movements or short-term performance, but instead focus on the fundamentals. This has been a major part of our historical success – taking advantage of the crazy times—and is based on the strategies of highly successful investors who have gone before:
“Investors make money in a bear market; they just don’t know it at the time.” – Shelby Davis
“If you stay rational yourself, the stupidity of the world helps you.” – Charlie Munger
“Be greedy when others are fearful.” – Warren Buffet
Stocks – While the major market indexes (S&P 500, Dow) were just barely positive for the year, several broader market averages (NYSE Composite, Russell 2000) were down 5-10% or more. This shows the underlying weakness & divergence we have discussed in past commentaries. In fact, by 1/5/16 the average stock in the major indices was down 24% from their 2015 high (Bespoke Investment Group).
Bonds – Interest rates ended the year slightly higher than where they started, with the 10 year treasury at 2.27%. As a result, bond returns were essentially flat with the Barclays US Aggregate Bond index up just .55% for the year. But just like stocks, many parts of the bond market were down 2-5% or more.
Not much changed from our Q3 commentary as the two-faced market continued, as did the moderate economic growth we expected. Volatility increased as oil continued to drop. At this point, many parts of the market look like extreme opportunities, like we have not seen since 2008-2009.
- The unemployment rate dropped to 5.0% as job growth ended the year strongly.
- Plunging oil & gas prices continue to save money for consumers.
- Interest rates – stayed relatively stable for the year despite expectations for significant increases.
- Housing construction resumed moderate growth and is expected to continue.
Challenges & Risks
- Oil prices continued to fall, which will lead to further job losses in that sector and more bond defaults.
- Interest rates – the Federal Reserve finally raised interest rates in December and laid out their expectations for rising rates over the next few years. We believe they are overly optimistic and will not raise rates near as fast as expected.
- Health Care – premium increases continued and will hit many consumers in the beginning of 2016.
- China – Their growth rate is in question, with fears of greater slowing spooking the markets.
- Russia, ISIS, North Korea, Iran – nothing changed here, probably won’t for a while.
Already in 2016 a lot has happened. We are working on further commentary and videos to help keep you informed in a timelier manner. We know this commentary is overly-simplified and want to provide more detail of what we are seeing to those who are interested. We will begin delivering video updates via our email newsletter in 2016. Please contact firstname.lastname@example.org if you are not subscribed. 1323ASM