Special Market Update

We write to you on the heels of one of the worst winter snow storms on record which impacted approximately one third of U.S. residents.  First and foremost, our thoughts go out to all those dealing with the aftermath of this deadly storm.  It feels like just last month given the unseasonably warm weather, many were questioning if we would experience winter this year.  This weekend was a reminder that winter does still exist.

The stock market has also given investors a reminder to start the New Year…downturns still exist.  The S&P 500 has declined 8% year to date and has now fallen 12% since its high last May.  A market decline is nothing to be alarmed about.  Actually, this is normal as you look at financial markets and history.  What has not been normal is our recent past and only experiencing one such similar decline of this level since 2009.  The recent volatility is a reminder for the financial markets that “winter” still exists.

So what is driving all the worry?  Headlines and concerns include:

• Angst over the Federal Reserve decision in the U.S. to raise rates 0.25% in December
• Geopolitical unrest to start the New Year, particularly with North Korea’s nuclear bomb test
• China, China and China – their stock market has declined 17% year to date coupled with concerns about another near-term yuan devaluation
• The price of oil and rapid decline – the speed of the decline with crude falling below $30/barrel has impacted all financial markets and forced selling as margin calls are made and business, consumers and the markets adjust forecasts for the reality of lower oil prices
• Concern in the fixed income markets, particularly credit concerns in the riskier, high yield space

Obviously, we know what is driving the worry and the above does concern our Investment Committee.  However, being lost in all the negative headlines currently are quite a few positives to consider:

• U.S. home construction starts – last year marked the strongest performance for home construction since 2007.  Over the course of 2015, ground breakings climbed 10.8% to 1.1 million.
• The odds of a U.S. recession right now given that 2/3^rd of GDP is attributable to consumer spending is less than 20% in our Investment Committee’s estimation.  Lower oil prices will only increase potential consumer spending as lower oil prices make their way to the pumps.
• The reality we will see more central bank intervention globally and more stimulus – European Central Bank President Mario Draghi dropped a heavy hint this past Friday that more stimulus could come as early as March.  Speculation is also rife that the People’s Bank of China and Bank of Japan might ease policy further.  In the U.S., the Federal Reserve is “data dependent” on taking any further action to increase interest rates.
• Valuations for asset classes have improved with the muted returns for stocks in 2015.  The S&P 500 dividend yield is now close to 2.4% and we are seeing positives as companies begin to report 4^th quarter earnings.

Key Takeaways:

1. Diversification has been key to providing you stability to meet your financial goals and protecting your portfolio.  We have seen the benefits of fixed income, alternatives and hedged equity in your portfolios.  We continue to advise maintaining a diversified portfolio, including some of the more beaten down asset classes such as emerging market stocks.
2. We are not saying the coast is clear and stocks will lift off the balance of the year.  In our Committee’s opinion, volatility is here to stay and you have to stay patient with the risk assets in your portfolio to reap the benefit of long-term investment gains.
3. If anything, the recent market turmoil has our Committee exploring opportunities to add to the portfolio in international developed country stocks, corporate bonds, emerging market stocks, oil and other commodities.  We will keep you apprised of any changes we choose to make.

As always, feel free to contact us with any questions.  We will remain diligent, reviewing the portfolio for risk/return and seeking opportunities and managers that can add performance given the current market conditions.