4th Quarter 2015 Market Commentary

You Said What?  As 2015 came to a close, many market commentators were suggesting a better year ahead.  A strong stock performance in the fourth quarter occurred almost entirely in the first three weeks of October.  Without that brief leap, the Dow and the S&P 500 would have registered nearly double-digit negative returns for the year.  As is often the case, experts were projecting the economy to continue on its steady growth trajectory.  They predicted a continuation of growth in employment, increases in salaries and wages, and no change in the level of inflation.  However they tried to minimize or ignore the challenges on the international scene, such as the real estate bubble in China, the disruptions stemming from the flood of immigrants into Europe, and the aggressive positioning by the Iranian mullahs in spite of their successful nuclear negotiation.  This troubled start to the new year has seen the stock market stumble out of the gate and confidence in it has been shaky at best.  Could this ennui be more a reflection of the dissatisfaction being stirred up by the early stages of the Presidential campaign than any of the economic indicators?  Recall six months ago, a Bush/Clinton contest was a foregone conclusion, but the voters have registered their dissatisfaction by gravitating to the upstart candidates on the right (Trump) and the left (Sanders).  This voter rejection of the picks by the leaders of each party reflects a deep-seated desire for fundamental change in Washington.

Thinning the Herd – Now that Iowa and New Hampshire primaries are in the rearview mirror, it is time for the remaining candidates to delineate the policies they favor and the legislation they plan to propose.  Voters have had their fill of personal attacks and invectives.  Yes, the party faithful are still in their “red meat” phase.  For Republicans, this means no new taxes and a gun for everyone who wants one.  For Democrats, the mission is to impose higher taxes on the highest earners (yet to be defined) so there can be more free stuff.   The independent swing voter says, “Wait a minute, isn’t it time for candidates to explain how they are going to be more fiscally responsible than the last two Presidents?”   After all, George W. Bush and Barack Obama are responsible for the addition of more than $13 trillion to our nation’s $19 trillion debt.  When Bush took office, the national debt was approximately $5.7 trillion, and when his successor Obama assumed office, the debt was approximately $11 trillion. The debt has more than tripled during their 15 years in office.  This era of unbridled profligacy must end.

Time to Emphasize the Positive – It is readily evident the electorate of both parties are unhappy with the present course.  Not only would the large block of independent voters be attracted to a more positive tone, they would welcome efforts to solve some of the country’s most intractable problems and eventually overcome the malaise blanketing the country.  Many dyed-in-the-wool Democrats and Republicans might find this approach appealing enough to change their votes.  To further muddy the waters, there are rumors Michael Bloomberg, former New York mayor, is considering a run for President as an independent.  Such a three way contest could make this election cycle one for the history books.

What are some of the real problems the candidates have yet to address in a serious manner during these debates?  Critical issues confronting the country are: tax simplification for both individuals and businesses; greater fiscal responsibility; serious funding deficiencies in entitlement programs; the Gordian knot of immigration; the appropriate role for the United States on international scene; and the stifling burden of governmental regulations at all levels.  It is unlikely leaders of either party are prepared to set aside their partisan views for the common good.

Why Change?  If the Washington cabal doesn’t demonstrate a willingness to address these long-festering problems, its members can expect to experience the wrath of the voters in November.  Trump and Bernie will see to that.  The anemic economic recovery has failed to impress anyone, and the extraordinary program of Quantitative Easing (i.e., Q.E.) instituted by the Federal Reserve (i.e., FED) has provided little or no benefit to most of the citizenry, but managed to exact a harsh penalty on savers.  Some observers believe the FED has exhausted its ammunition, and now it is time to unleash the big guns of fiscal policy.  Does this mean a return to the heyday of Keynesianism when governments looked upon additional spending as its primary tool to stimulate the economy and prevent (or exit) a recession.  Fiscal policy has long been ignored because of the huge national debt and the conservative phobia over spending and taxes.  In order to reinvigorate the economy, a fresh approach is needed.

Investment Outlook – Investments in 2016 started with a thud as the Dow Industrials plummeted 9.5% in the first three weeks. To the relief of many, the market recovered four percent from that depressed level.  What accounts for the turbulence investors must at times endure?  It is a witches’ brew, and many of the ingredients have already been mentioned.  One deserving special attention now is the trend of corporate profitability.  Over long periods of time, there has historically been a high correlation between stock prices and corporate profits, and there has been a noticeable slowing of profit growth over the past three quarters.  Since many companies are trimming their earnings projections, a meaningful advance in the general market is unlikely and volatility of prices can be expected to remain high.  With such a hazy outlook, now is a good time to review ones investment goals.  For most investors, investing is a long-term commitment.  History provides perspective and some consolation.  Market declines are followed by recoveries.  Even the devastating 40%+ plunge back in 2007-2008 was totally recouped in three years.  Nevertheless, older investors must consider adopting a more defensive stance during such periods because they often want to know they can access their funds if they need them.  This means favoring protection of principal over reaching for capital gains and higher levels of income.  The safest investments, government debt or bank deposits, yield virtually nothing in today’s environment, yet they do provide the most safety.  Common stocks remain the preferred asset class because they offer reasonable value.  Many provide a dependable income flow as well as potential for growth of both principal and income.  Large blue chip stocks offer the best combination of growth and income at this time.

As if zero interest rates weren’t the cause of enough concern for investors in need of income, now there is the threat of negative interest rates.  If this sounds like a foreign idea, you are right.  It has existed in Japan for some time, and it is now spreading across Europe.  The concept is simple you pay the government or your bank to hold your funds.  Why are governments, including ours, pursuing such a questionable policy?  The short answer is desperation.  Economic growth has continued to languish near the two percent level.  Even the FED has lost confidence in the ability of Quantitative Easing to provide the desired level of stimulus to the economy so they have identified negative interest rates as a possible solution.  Positive results are a long shot, well beyond three-point range (basketball term), whereas as negative results are easy to envision.  As was mentioned earlier, Congress and the administration should be diligently trying to develop policies and programs to stimulate growth, so that families can see their incomes grow and have greater confidence in the future for themselves and their children.

Annual Requirement – Around the Office – Each year at this time we offer you an updated copy of our Form ADV, Part 2, which we file with the Securities and Exchange Commission.  Please let us know if you would like to receive a copy.  We will send you a paper copy, but it is also available on-line at our web site – “lenkladner.com”.  For those of you looking forward to paying your taxes or receiving your refund, Schwab has sent the necessary tax information Friday, February 19^th.   Once you receive it, please contact us if you feel you are missing any information.  Now is also a good time to arrange for a review of your account and plan for the year ahead.

                                                                                                                                               2/23/2016 – JML