Quarterly Commentary, Q4 2015

Benchmark Returns for the Period Ended December 31, 2015

Quarterly Commentary

After almost 10 years of near-zero interest rates, the Fed finally made its long awaited move to raise interest rates. An increase of .25% is a modest takeoff, but shows a continued confidence in the American economy and signals the last step to end the Fed’s stimulus program. Future hikes will most likely be small and gradual as long as economic growth continues. Rising short-term rates can affect short-term loans, credit cards and money market rates, but likely will not have a dramatic or immediate effect on mortgages. Ironically, shortly after the Fed raised short-term rates, the average on the 30-year fixed-rate mortgage fell. Mortgage rates closely follow the 10-year treasury and are influenced by inflation expectations and the global economic outlook.

The third quarter GDP report showed a seasonally-adjusted annual growth of 2%, mostly driven by a rise in consumer spending. Personal consumption has increased over 3% in four of the last five quarters, while inflation has stayed below the Fed’s 2% target for 43 consecutive months. This can largely be attributed to declining oil prices, but most indications point to a slow creep higher. Over 12 million jobs have been added since the end of the 2009 jobs crisis and, as a result, the unemployment rate has dropped significantly from 10% to 5%.

While nearly all sectors posted strong gains during the final quarter of the year, 2015 proved to be a volatile, but overall lackluster, year for the equity markets. The fourth quarter’s strong performance was not enough to reverse the previous quarter’s losses, resulting in a nearly flat market for the year. Emerging markets suffered and greatly underperformed other asset classes with the MSCI Emerging Markets index down -14.92% for the year. The Dow and S&P 500 mostly recovered from their dramatic August declines, closing out the year up 0.63% and 1.38% respectively. The Dow closed the year with its worst pre-election year return since 1939. Since 1933 the Dow has had average returns of 10.4% during pre-election periods.

During December alone the S&P 500 had 11 moves of 1% or more, but still ended nearly flat for the year. However, the S&P 500 still outperformed international and emerging markets in 2015. In fact, this is the third straight year (2013-2015) that a globally diversified portfolio has trailed the S&P 500. Some of the international markets underperformance in 2015 is attributed to the strengthening of the dollar. When diluted foreign currencies are repatriated it provides a headwind for international markets. However, we are confident that the inclusion of non-correlated asset classes such as international and emerging market stocks contributes to a bedrock investment philosophy and increases our clients’ odds of achieving long-term success. Most people remember the “lost decade” for U.S. stocks from 2000 to 2010, but do they remember that a globally diversified portfolio during that same timeframe nearly doubled clients’ money?

With the myriad of global economic and political issues causing investor anxiety and uncertainty in the markets, volatility will most likely persist. In Florida they say, “If you don’t like the weather, wait a minute,” and the same can be said of the stock market.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.