2015 Review: Economy & Markets

01/26/2016

Dear Clients and Friends,

Happy New Year from all at Monument. We wish you all the best for a happy and healthy 2016. We are writing to summarize the economic highlights of 2015 and offer our thoughts as to what the highlights may (or may not) tell us about future equity and bond market returns. Also, we are delighted to announce that we have been recognized as 2016 Five Star Wealth Managers* which will be highlighted in an upcoming issue of Boston magazine.

2015 Review: Economy & Markets

Investor discipline was tested in 2015 as equity market volatility returned. The chart below highlights some of the year’s prominent headlines in the context of broad US market performance, measured by the Russell 3000 Index (the Russell 3000 Index represents 99% of the US equity market). While many stock market analysts and money managers, along with the media, would lead us to believe that we can view each day’s headlines and understand why the market moved in one particular direction, we are not offering the headlines to explain the market returns. Instead, the headlines serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the current events.

The chart below offers a snapshot of non-US stock market performance (developed and emerging markets), measured by the MSCI All Country World ex USA Index. The headlines should not be viewed as determinants of the market’s direction but as examples of events that may have tested investor discipline during the year.

US Economy

The US economy grew modestly during 2015. Gross domestic product (GDP) increased only 0.6% in Q1 before improving to 3.9% in Q2 (year over year). Growth slowed to 2.0% in Q3, matching the average annualized growth for the past six years. Q4 GDP growth was forecasted to decline to 1.0% and GDP growth for all of 2015 to average 2.5%.

Overall, the economy added 2.7 million jobs, capping the second-best annual gain since 1999. December wages were up 2.5% (year over year), which marked one of the best gains of the current expansion, although still below the 6.33% annual average. Inflation (personal consumption expenditures index) remained low. November’s 0.5% rate (year over year) marked the 43rd straight month of annualized inflation below the Fed’s 2% target rate. US housing activity remained solid with price growth, as measured by the S&P/Case-Shiller Home Price Index, rising 5.2% (year over year) through October. New home sales increased 14.5% through November. Consumer confidence also improved, with the University of Michigan’s Index of Consumer Sentiment averaging 92.9 in 2015—the highest since 2004. Consumer spending, which accounts for more than two-thirds of US economic activity, grew 3.0% in Q3.

Negative economic indicators included declining US factory activity. In December, the Institute for Supply Management’s (ISM) index fell to 48.2 from 48.6 in November, which was the weakest reading since the final month of the recession in June 2009. (Readings below 50 indicate contraction.) Corporate profits declined in Q1 and Q3 by 5.8% and 1.6%, respectively, and profits at S&P 500 companies were projected to fall by 3.6% in Q4.

Takeaway

As evidenced by the two charts and economic text, there were clearly both positive and negative economic headlines in 2015. What does this mean for investors moving forward?  Should we be aware of recent economic results and future economic forecasts? Yes. Should we shift investment strategies in light of current economic conditions? No.

In a continual effort to find alpha (investment outperformance, in short) and produce acceptable (if not ideal) risk-adjusted returns, we generally turn to empirical evidence, proven strategies and other reliable resources for input and insights. In this light, economic growth and its relationship to equity market returns has been explored extensively by academics, researched by Vanguard (among other leading investment firms) and discussed by Warren Buffet. In summary, the research is compelling that there is not a positive link between forecasted economic growth and equity market returns. We look forward to sharing the research with you in future communications.

Until then, thank you for your trust and confidence.

Sincerely,

Byron E. Woodman, Jr.           

President                  

Lee C. McGowan, CFP®

Managing Director