Insights & News

January 2016

FAI's Year End Review & Investment Outlook


In the year just ended, the world's securities markets were unkind to most asset classes.
 
U.S. Stocks

U.S. stock prices wandered indecisively between - 3% and +3% during the first half of 2015 making very little progress in either direction. The market turned drastically more negative in August (see the S&P 500 chart below) as currency & economic weakness in China weighed on stocks. An October rally boosted the index back to barely positive... then drifted to the remainder of the year to a -0.7% price return.

S&P 500                                         Calendar 2015                                                CNN Money

 
But weakness in U.S. stocks was deeper and more widespread last year than indicated by this chart. As of 3 weeks ago, the ten largest stocks (by market value) had actually risen this year by +21% as a group, while the remaining 490 companies' shares had lost -2.6%! That is the widest price performance advantage for the big ten for the last 15 years.
 
Value vs Growth Stocks
As mentioned above, the U.S. stock market returns were very concentrated in a few highly valued growth stocks. In contrast, the Russell 1000 Value Index posted a price return of -6.19% for 2015 (see chart below).
 
RUSSELL 1000 Value Index
Source: Factset
 
History has shown that value stocks have outperformed growth stocks over a long period of time, but 2015 was a year of exception. Since we are value investors, 2015 was a difficult year for us to gain positive performance traction in the stock portion of your portfolio because of the underperformance of value stocks reflected in the chart above.
 
Other Investment Classes
Often when U.S. stock returns disappoint, other asset classes (bonds, commodities, real estate, precious metals, foreign securities, even hedge funds) come to investors' aid. That's the underlying rationale for keeping portfolios diversified. But last year, soft returns were unusually widespread! Here's a few of the 2015 disappointments:

Barclay Hedge Fund Index         +1.6%                          MSCI World Stock ex-USA:         -5.6%
REIT Index                                  +0.6%                            NYSE Composite...                        -6.4%
Commodity Trading Index       -0.3%                             DJ Utility Average...                      -6.5%
30-yr U.S Treas. Tot. Ret.            -2.7%                          Gold price                                        -11.1%
Blmbg. Hi-Yld. Corp. Bd. Index -3.5%                           MSCI Emerging. Mkts. Index    -15.9%

 
So, in summary, market turmoil and economic growth questions generated very few places for value oriented diversified investors to generate positive returns in 2015.

 

2016: Global Caution Still in Order

 

2016 First Week
 
In the first week of trading, global markets continued their volatile trading patterns. The Chinese equity market as well as a possible hydrogen bomb test out of North Korea has investors on edge. Towards the end of last year and into this year FAI anticipated some weakness in both the equity and bond markets to start the year. Deterioration in our leading economic indicators and concerns over the credit quality of some lower quality bond issuers led us to make a few changes to your portfolio. First, we decided to significantly improve our bond investment credit quality through a few mutual fund trades. We also lowered our stock exposure by selling/trimming a couple of our long-term winners. We are now underweight to equities and are looking for better pricing and improving economic conditions to put those proceeds back to work at better valuations. During this tumultuous first week, our investments have done relatively well with three of our major asset classes posting positive returns and our stock portfolio outperforming the market.
 
The Rest of 2016: Vigilant, Diversified, and Opportunistic 
 
During 2016, we expect continued volatility driven by political and economic turmoil globally. Two key areas of focus for FAI are the Chinese economy and the U.S. housing markets. The Chinese economy has slowed faster than many economists expected. We think that growth needs to stabilize before global markets can improve. Also, the U.S. housing market has a leveraged effect on the U.S economy including job growth and consumer spending. The U.S. housing market will need to continue to improve for economic growth to continue in the U.S. Because FAI sees these two areas of significant importance to the global markets, our focus will be on them throughout 2016.
 

In this volatile environment, we believe it is essential to remain vigilant, diversified and opportunistic. The following are some of the ways we are maintaining a diversified risk-reduced posture in all four of our Portfolio Profiles.

  • Equities. Our style is to always own high quality stocks in portfolios, but to scale back our equity exposure when stocks are expensive and increase when they are a bargain. Stock exposure is currently well below its upper limit in all of our Portfolio Profiles.
     
  • Tactical Strategies. We own specialized mutual funds whose style is designed to be productive in weak markets because of their ability to go both long and short.
     
  • Precious metals. Precious metals, which can attract frightened capital from around the world when the headlines feature terrorism, armed conflicts, currency wars or deflation.
     
  • Bonds. Bonds are the classic defensive investment when stocks underperform. We currently emphasize short duration, high quality bonds.
     
  • Emerging Markets. We emphasize high quality companies chosen by portfolio managers and analysts that live and work in the countries they are investing.

 

We appreciate your business and look forward to seeing you in 2016.

 

Curtis Gross
Chief Investment Officer     

IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FAI Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from FAI Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. FAI Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of FAI Wealth Management's current written disclosure statement discussing our advisory services and fees is available for review upon request.


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