Q2 2016 – Market Summary

As I write this large U.S. stocks sit in virtually the exact same place they sat 50 weeks ago. They’ve only been lower between then and now except for a month ago when they were at this same spot.

Last August we had an 11% drop in 5 days, bounced, retested the low in September, and then clawed back to within 1% of the high by early November. A more controlled slide occurred through November and December. January was somewhat of a repeat of August, retesting the lows and moving lower still in February.  

January was a very strange month. There seemed to be a high level of broad unjustified fear pushing markets lower. I had people tell me they thought 2008 and 2009 were about to happen all over again. It’s normal for your brain to want to tell you the next shoe is about to drop after the feeling of a traumatic time is hormonally (cortisol and adrenaline) seared into your conscience.

I never saw a reason for the selloff so we used that as a time to rebalance portfolios. It wasn’t much fun to go through January with August’s rapid drop fresh in our minds.

We had a nice steady climb from February 11 to June 8. At this point markets seemed quite content with an underlying strength that was pushing our highest potential baskets of stocks to very respectable year-to-date (YTD) gains. Small cap stocks were holding a very nice lead relative to large cap stocks and emerging markets were up even further. Then we had Brexit.

For U.S. stocks Brexit was a small hiccup and quite good for bond markets. It took a few short days for our stock market to mostly recover while emerging markets stocks have regained their strong lead YTD. The Momentum fund we’ve added in the last year is also winning relative to a generic basket of large U.S. stocks. Small U.S. stocks are still doing reasonably well for us YTD. They dropped from a leadership role to being about 0.50% behind in relative terms but just today they’re up about 2.3% on a strong employment report.

It’s been a very messy 50 weeks and new clients to WAM certainly haven’t been calling us to tell us how much they’re enjoying the ride.

U.S. stock haven’t done much for us for about a year and a half and stocks outside the U.S. have been a drag for about two years. Very diversified WAM portfolios do get some benefit from movement of stocks outside the U.S. even if those stocks aren’t making any headway. Younger WAM clients, with significantly more concentrated portfolios, really haven’t been feeling any joy for some time. The stocks with the greatest potential haven’t been showing it.

10 year returns for stocks are still running well below long-run averages. There are good arguments why we won’t reclaim those long-run averages any time soon. China is not doing great (command and control socialism), Brazil terrible (socialism), and Europe (bureaucracy) has yet to fully recover from the financial crisis of ’08 and ’09. Fundamentally I believe Brexit has the potential to create some level of systemic change in Europe so their economy can get back on track in the coming years.

We’re not in unchartered waters. There have been extended periods in the past where the stocks with high potential and non-U.S. stocks lag. Conversely there have been extended periods where U.S. stocks have lagged stocks outside the U.S. Over time, on average, there’s been benefit to owning a global portfolio. And while our more concentrated (mostly those of people with many years until retirement) portfolios haven’t been much fun for years, it’s arguable the spring is being wound tighter and we’ll eventually get paid for our patience.

Stocking money away in savings and retirement accounts now may pay well later.

Despite what’s happening outside the U.S. our economy is doing pretty well. Today’s payroll number exceeded the highest estimate and our central bankers are leaned a bit toward tightening.

Our domestic taxable bond funds are doing quite well this year even in the face of rising interest rates (up between 4.72% and 7.89%). Our international bond fund has been impacted by global events and is down 2.85% YTD but currently yields 3.71%. Our municipal bond funds are up 2.59% to 5.79%.

Like most market watchers I don’t think we’re going back to long-term equilibrium rates of return right away but I don’t see evidence of a fundamental change to underlying economic incentives for people around the globe. I do see smaller U.S. stocks showing near term relative strength as they did right before Brexit. Wouldn’t it be nice if we knew exactly what tomorrow will bring?

As always, I truly appreciate the confidence you’ve place in us with your assets and I want you to feel free to call at any time regarding your portfolio or any personal financial matter.

Sincerely,

Erik S. Wolfers, MBA, CFP^®