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Quarterly Commentary: What to Expect in 2016

For the first time since 2008, December ended a year where both the Dow Jones and S&P 500 finished with negative returns. Couple that with struggles in the international market and minimal gains in bond funds, and you have a year that saw many with results on the wrong side of the line.  Unfortunately, things didn't get better when we turned the page to 2016, as global markets, including the United States, have already seen more than a 7% decline this year (Source: Bloomberg Business).

So where do we go from here? Honestly, the jury is out. Everything points towards a year not so dissimilar to the past two, which ended up slightly and down slightly, respectively. The major problem for most investors is finding spots to achieve gain and/or yield. It is not easy. Interest rate increases, of which the Fed now says there will be three this year, make bond values fall, especially long-term bonds, which carry the best yield. And then there is inflation, otherwise known as a bond's worst nightmare. Inflation makes an impact on the value of yield payments. For example, if a bond is giving you $50 of interest per year, the value of that $50 goes down as inflation goes up. It puts more pressure on the safe/conservative end of the spectrum, which is more challenging in an environment where significant gains are a struggle on a good day.


On the stock side of the spectrum, we are paying a lot of attention to oil. Sure, we all love it when we can fill up the car for under $2/gallon, but the truth is that low oil prices can get dicey on a global economy level. Oil production and the revenue it generates are important to major economic players like China, Russia, Canada, and the United States. More importantly, it is one of the chief exports for countries in the Middle East, which, as you know, are already in some of the most politically dangerous times in recent memory. Lower oil prices do not help there, nor do they help the militaries of the U.S. and its allies who are stationed there. Over the course of the year, we still believe oil prices will rise, albeit slightly, but the short term for stocks like Chevron and Exxon, and funds that invest in them, may not be that wonderful.


For new money, or cash, slower markets can be great times to invest. Think of it as going to the grocery store only to find that the prices of everything are 7% lower than last week. Stock up! The trap is thinking too much about whether or not the price will be even lower next week. Trying to time the market, or find the bottom, is a risky strategy. You have just as good of a chance of finding that prices have gone back to normal instead of down further. If you have investible cash, this is a great time to put that cash to work. It might get worse before it gets better, but better it will get.


As for money that is already invested, the current environment lends itself much more to a management and preservation strategy than an aggressive change of course. One of the benefits of diversified portfolios is that the struggles of any one sector do not drag down an entire portfolio. While we continue to tweak portfolio allocations, and make strategy changes as needed, we do not think that an overall change, or sell-off, is in our clients' best interest. After all, if we sell out of struggling positions while they struggle, we accept the losses. As always, when the markets are down, and reasonable expectations are less than wonderful, the best way to get through it is to stay the course.


Only time will tell what 2016 holds. We cannot predict the entire year off of a couple weeks of returns, good or bad. That said, from this advisor's vantage point, at this particular moment in time, I would expect a relatively flat year...even if the road to the end is bumpier than ever.

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