Let us first wish you a Happy New Year! We hope 2016 will be a healthy, fulfilling and prosperous year for you and your family.
Since most of our clients have at least a portion of their investments in equities, now is a good time to review how the past year compares to the S&P 500 over the last decade:
From a return perspective, 2015 was a disappointing period for stocks. The long term positives for stocks were offset by worries over the effects a Federal Reserve tightening might have on the United States economy, a drop in oil prices and a slowdown in China.
While we are aware of these market concerns, they have not altered our long-term positive outlook on the markets and here is why:
- Federal Reserve tightening: On December 16, 2015 the Federal Reserve raised its targeted Fed Funds rate by 0.25%. As we have stated previously, the Fed is very vested in the current economic recovery. They have gone to extraordinary lengths to build this recovery and are not going to jeopardize its durability with rate increases that are not supported by economic strength.
Additionally, the Federal Reserve is not looking to slow an overheated economy, but to simply back out the highly accommodative emergency measures put in place in 2008. As such, they have stated that this is going to be a more gradual, slower tightening process than in previous cycles. Rates are currently so low that for at least the next two years, it will be reasonable to think of the Fed as simply being less accommodative.
- Lower oil prices: Oil prices are under pressure due to oversupply. While this is a major hit to about 8% of the larger S&P 500 companies, and as such has gathered much in the way of business media attention, it is a positive windfall to consumers and many non-energy related corporations. Likewise, this is a global positive that is helping overseas economies.
- Slowdown in China: An economic slowdown in China was tied to some global market selloff days in late summer and early fall. Given that US exports to China are just 0.7% of our GDP, we believe this is another issue that has gathered more than its fair share of media coverage and momentum. As one economist wrote, “Yes, China is slowing, so what?” Even if it does matter, Chinese authorities are working to address these issues. Just like US Fed easing in years past, it will take time to determine if their maneuvers have been successful.
Supporting our continuing long-term market optimism are fundamentals that remain solid including:
- Private sector jobs have increased for 69 consecutive months. That is the best streak going back to at least the early 1900s.
- The unemployment rate is at 5.0%, down from 10.0% in October of 2009.
- A strong recovery continues in the housing and construction industries. Based on population growth and “scrappage” rates, it is estimated that a great deal of the recovery in home building is still ahead of us.
- Auto sales remain at near record levels.
- Global inflation is low and supported by undervalued energy and commodity prices.
- Outside the energy sector, corporate profits continue to grow. Companies are maintaining healthy balance sheets that have large amounts of cash which give them future power and flexibility.
- Consumers continue to pay down debt and build their savings.
- Global monetary policies are highly accommodative.
- Equity valuations remain at attractive to fair levels.
For the reasons listed above, we believe stocks remain the place to be for long-term investors in 2016. As we have stated in earlier letters, market pullbacks like those experienced in 2015 are a normal and healthy part of long-term investing. Due to the fundamental strengths, we do not see the current market situation developing into a major bear-market selloff. Those are typically associated with recessions and, given the fundamentals, that is unlikely in the coming two years.
We genuinely appreciate your business and value the trust you have placed with us in the management of your financial assets. As always, we welcome and encourage you to schedule an appointment to review your personal situation.
Ryan T. Lynch, CFP® ChFC®
Form ADV Part II of the LYNCH & Associates Uniform Application for Investment Advisor Registration and the LYNCH & Associates Code of Ethics are available to all clients at any time. If you would like to receive a copy, please contact Jennifer Farless at (812) 853-0878 or jfarless@LNAonline.com.
Office: 10644 Newburgh Road, Newburgh, IN 47630