January 2016

“Happy New Year?”

Last week was the worst opening week of any year in history, with the S&P 500 down 5.96%, the Dow Jones Industrial Average (DJIA) down 6.19%, and NASDAQ down 7.26%. The year 2016 has started with tensions from North Korea’s nuclear test, discord (still) in the Middle East, concerns arising from the slowdown in China -and a significant sell-off in the Chinese stock market, volatile currency movements and the drop in oil prices not seen since the 1990’s, oh and The Federal Reserve is raising rates. Quite a list, isn’t it?

Markets are challenging, but we’ve seen this and worse many times before. Knee-jerk reactions are to pull out of troubled markets and let it all blow over. But as experience has taught me many times, this is the time when opportunities may be greatest to find investments with the greatest potential to reward investors over the long-term.

Oil and Energy: The sentiment is that oil companies and related markets will suffer for years with overwhelming supply and lower prices. My view is slightly different – current estimate show US production has declined by 400-500k barrels a day since peaking in June of 2015*. Importantly, although inventories are still at elevated levels, demand continues to be high as well and the International Energy Agency (IEA) has increased its demand estimates for YE 2015 by 50% from earlier in the year. I certainly don’t anticipate oil prices to be at previous levels in the short-term, but I see opportunities at this level for the major players in the field.

Commodities frequently have their boom and bust times – remember gold at $1,800 in late 2011, with the news anchors telling us $2,500 or even $5,000 is possible? You can still hear some of the commercials on AM radio telling you that this is the last chance to protect yourself and your families from financial disaster. (yes I listen to AM sometimes – good sports shows).

Interest Rates and The Fed: Sentiment is that rising rates may kill a slow, post-financial recovery that has never fully taken hold. I feel that rising rates signal the Fed’s belief that the economy is no longer in a vulnerable post-crises state, and I view that positively. The emergency of 2008/2009 is long over, so monetary policy needs to adjust. We recently saw unemployment numbers that were far better than expected with an unemployment rate at 5% – which by the way is often referred to as “full employment level”. Consumer spending, home sales and auto sales have also strengthened. Interest rate hikes can have negative consequences eventually, but not usually this early in the cycle.

China: This sounds like a broken record. Who remembers Greek sounding names? Last year, those fears centered around a Greek exit (“Grexit”) from the Euro and the removal of the Swiss Franc peg to the Euro. The only difference is that this year’s panic is being blamed on China, not Europe; but it’s still the same old story of overseas fears spooking U.S. traders. This is not to downplay China – its market is very dangerous in my opinion, with much volatility and less liquidity than the US’s. As Ed Yardeni reported in his Morning Briefing last Tuesday, January 5th, the Shanghai-Shenzhen 300 Index is down 35.2% from last year’s high (set on June 8), but it is still 66.2% above its March 20, 2014 low. Now that’s volatility!

I would also argue that China is moving from a manufacturing economy (based on low-cost labor, built on physical brawn) to a service economy (with higher-paid, more educated workers) focused on greater domestic consumption. This is a natural path which Japan (and America) have gone through in the past.

Let’s Look Ahead

Going forward into 2016, the US economy is clearly continuing to grow. Consumption and basic investment are strong and a sign that the domestic fundamentals are doing well. Most of the uncertainty and worry are external with the much discussed slow-down in China and the knock-on effects that has for other commodity exporting nations like Brazil and Australia, as well as continued slow growth in Europe and Japan. The world economy is not booming and that raises the legitimate question of what our expectations should be and what considerations should guide Fed policy.

My rules for 2016 are:

1) Keep the dividends coming. While much of our dividends have traditionally come from the oil patch, I think using dividends as a stabilizer in your portfolio is more important than ever. If possible, reinvest those dividends which equals compounding, which along with time, is the magic of investing.

2) Diversify – While it’s nice to hit a homerun now and then, putting all your eggs in one or two stocks generally ends up poorly.

3) Diversify Geographically – More and more of the world’s wealth is created in nations other than our own. There are terrific international companies which can help mitigate risk and increase returns.

4) Buy high quality investments, for the long term. Avoid the short-term mindset which can upend your portfolio and make it impossible to recover and meet your goals.

5) Try to be as tax efficient as possible.

6) Please call or e-mail me with any questions or concerns – the worst question is the one unasked. Our phone number is (775) 850-2500 and my e-mail is: phil.mahoney@lwpreno.com

Happy New Year! Our best wishes to you and your family for a Great and Prosperous 2016. And as always,

Thank You Very Much for Your Business.

Phil

*U.S. Energy Information Administration; 12/16/2015 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Diversification does not ensure a profit or protect against a loss. No strategy assures success or protects against loss. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Some of this research material has been prepared by LPL Financial. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 stocks traded in the Shanghai and Shenzhen stock exchanges. All indices are unmanaged and may not be invested into directly. Referenced Tracking #: 1-457507.