After a tumultuous year, I am personally glad to see 2015 come to an end. We had too many friends, family and clients (whom we count as friends as well) become ill or pass long before they should have. Our hearts are heavy with the loss and struggles of those we care about and yet know that we must still try to move forward with those voids. One of the sayings that we quote most is attributed to Mark Twain, “history doesn’t repeat itself but it rhymes,” is as true today as it was in Mark Twain’s time. Things are not exactly the same but you sure can see some similarities. To quote one of the legends who passed away in 2015, Yogi Berra, “it’s déjà vu all over again” seems also to be fitting in these times. I’m not sure how many times we can write or say the same thing, or for that matter how many times you will listen to us say the same things over and over again. But here we are, in the process of reiterating what we have said before, because history rhymes and it is déjà vu all over again.
China is at the top of the list of economic concerns globally and that is not likely to resolve itself until the government stops trying to “engineer” its idea of economic normalcy. The Middle East is still a hot-bed of turmoil and terrorism that is now spreading to Europe and other countries. Who would have thought that after oil exports, terrorism would be the regions second largest export. Have we not already seen variations of this play out in the past? Europe, now dealing with terrorism domestically, is in a very slow growth environment (much like the rest of the world), and still trying to deal with their over-leveraged economies. Of course we all know of Greece’s issues last year, but Spain, Italy, Portugal and even France have issues that the governments are trying to “engineer” towards the perfect outcome. Emerging economies are actually in the best shape fiscally that they have been in for decades, but their Achilles heel may very well be foreign currencies (specifically dollar denominated debt).
The broad markets around the world were mostly negative for 2015, with the All-Country World index down 4.6%, Aggregate Bond index down 1.9%, S&P 500 index down 0.8%, US Small Cap stocks down 5.9%, Emerging Markets down 18.1%, and Commodities were down 30.6%. While we avoided the worst areas in the markets last year (emerging markets and commodities), we were overweight mid and small cap stocks in the US. Going into the summer correction we were comfortably ahead of our benchmarks and during the pullback we went down roughly in line with the broader markets. It was only coming out of the summer correction that our small and mid-cap stocks underperformed and gave away most if not all of our advantage for the year. We still are taking substantially less risk in the portfolios than our benchmarks and we believe that will continue.
What do we see for 2016? A continued muddle through economy, both domestically and internationally, with the very real possibility for a recession. This time next year, we will be welcoming in a new President and with that, hopefully continued recovery in the economy. For the first time in decades, I think we could get some corporate tax reform to make our tax system more competitive with the rest of the world. Even Bill Clinton, who raised the corporate tax rates in the 90s, believes that they need to come down. I think history will show that the Paris shooting/bombing with be the turning point in dealing with terrorism. You know it’s serious when the French get riled up! China, with little success will continue to prop up their markets, but ultimately the economy and stock market will find its equilibrium point.
To close this all up and bring it full circle, a little editorial commentary. As we’ve said so many times before, politicians and global leaders cannot continue to “engineer” monetary outcomes. The Federal Reserve’s balance sheet has gone from $1 trillion before the financial crisis to $4.5 trillion as of the end of 2015. The Federal Debt has gone from less than $6 trillion to over $18 trillion this century. That is both Republicans and Democrats during that time and we are on an unsustainable course and stealing (umm, borrowing) for our children. The correction that it will take in order to get us back on a path to prosperity will be very painful for many people (as it already has). This has been and continues to be our outlook and let’s hope that whoever we elect this year won’t continue with the same policies (deficit spending) that have gotten us where we are today and we can start living within our means as a country (just like you do as an individual).
Finally, we wish everyone a healthy, happy and prosperous 2016!