Recap and Thoughts For 2016
First, 2015 saw the worst year for stocks since 2008. When looking at diversified indexes, U.S. stocks were down but they did better than Developed (ex: Europe & Japan) International, and Emerging markets were even worse. In 7 out of the last 8 years, U.S. Large Cap has outperformed broad international stocks. On the bond side, long term bonds took it on the chin.
Being diversified is still important as it protects you from concentrating too much money in one area and suffering large losses in any given year. Stick with your strategy. Realize that somebody, somewhere did better than you this year. People that owned only tech stocks probably crushed you this year. Is that a strategy you should pursue? Probably not, but you need to remind yourself why you have the strategy you do. Everything has a bad year now and again.
If you think you are entitled to the best return or the best strategy every year, good luck to you. You will bounce from strategy to strategy, constantly disappointed with your returns. You will chase performance and fail to capture the long term return of ANY strategy, let alone the “best” strategy. You’ll fire dozens of financial advisors and complain to your friends about what schmucks these clowns are. You’ll say the markets are rigged. For you, they are and always will be.
As we look ahead to 2016, I thought it would be good to share what I have been reading and how I am approaching the upcoming year.
Unplug Your Portfolio
During this election year you will hear many negative, disconcerting thoughts on the U.S. economy and the overall health of our country. It will be important for investors to not react by changing their long term portfolio strategy. I am positive on the U.S. economy and U.S. stocks.
The budget deficit is much more cyclical than many investors realize. During the last recession, the budget deficit expanded to 10% of GDP. Today, the budget deficit has decreased to 2.5% of GDP. This is better than the long-term average.
The constant barrage of negative news about the under employed and wage growth makes most people believe we are in a horrible position. Consumer confidence is better than the long-term average as well. Real wage growth increased 2.3% over the past 12 months. This isn't as good as the long term average of 3.6% but it is increasing and purchasing power is the strongest in 6 years.
Small business is trending upward. Hiring intentions by the small businesses is above its long term average meaning they are planning to hire more people.
The U.S. dollar has been smeared for years due to monetary and fiscal policies. Most people believe the dollar is worth less and is set to become a third world currency. Actually, the U.S. dollar has been appreciating for the past 7 years.
Outside the U.S.
According to Vanguard Chief Economist Joe Davis the growth outlook for developed international markets remains modest, but steady. He expects Europe to positively contribute to global growth.
Oppositely, Davis believes the high-growth "Goldilocks" era many emerging markets enjoyed over the past 15 years is over. He anticipates sustained fragility for global trade and manufacturing, given China's ongoing rebalancing. He does not anticipate a Chinese recession in the near term, but China's investment slowdown represents the greatest downside risk.
Overall, the U.S. economy is relatively healthy. The bull market in stocks has supported this improvement and those that kept their money in the market have been rewarded. During this election year and being in the mid-cycle of the current economic recovery, investors will do well to unplug their portfolios from the emotional, negative rhetoric.