2015 Markets: Nowhere to Run, Nowhere to Hide

“2015 was the worst year for U.S. stocks since 2008” is the headline you are likely to see, but going by the numbers, it wasn’t that bad -- or was it? The S&P 500 was down by less than 1 percent, though including reinvested dividends, the index eked out a gain. Small caps fared worse, with the Russell 2000 falling nearly 6 percent, but the NASDAQ increased by 5.7 percent, so not so bad, right? The real problem for disciplined investors who adhered to diversified asset allocation models last year was that there was simply “Nowhere to run to, baby, Nowhere to hide” (h/t Martha and the Vandellas). In fact, 2015 was only similar to 2008 in that many asset classes moved in tandem. If you recall Asset Allocation 101, the whole point is that when stocks zig, another asset class like commodities zags. Yet, the S&P 500 and the Nymex crude oil “both closed down on 87 out of 252 trading sessions in the year. That’s the most in any year since at least 1984”, according to data from The Wall Street Journal’s statistics group.

And if you are the type of investor who sprinkled a dash of the more far-afield asset classes to add a little spice to your portfolio, 2015 may have been far worse. In addition to the crushing performance of oil and commodities, the MSCI emerging equity index was down 17 percent in 2015, its fifth straight year of underperformance versus developed indexes, as the toxic trifecta of slowing growth in China, the commodity washout and a rising US dollar were simply too much for the index to bear.

Maybe you sought to juice up your fixed income return with riskier bonds last year. If so, that decision hurt. The Barclays US corporate high-yield bond index lost 4.5 percent, while longer-dated corporate credit for investment grade holdings, slid 4.6 percent. Had you simply stuck with a boring intermediate term bond index, you would have seen small gains on the year. According to data compiled by Bianco Research LLC and Bloomberg, a case can be made that 2015 “was the worst year for asset-allocating bulls in almost 80 years.”

Does that mean that asset allocation does not work? Perhaps you have a case of investor amnesia and forgot about the dreadful first decade of the 21^st century. From 2000 to 2010, the annualized return of the S&P 500, including dividends, was just a paltry 1.4 percent per year. During that same time frame, the Russell 2000 was up 6.3 percent and MSCI Emerging Markets Index jumped 16.2 percent. And if you had owned bonds, your performance improved dramatically. During those ten years, a portfolio of 60 percent equities (split among different types of stocks) and 40 percent fixed income had an annualized return of 7.83 percent.

Does asset allocation work? Over the long term, YES!

2015 Performance

• DJIA 17,425: down 2.2%
• S&P 500 2,043: down 0.7%
• NASDAQ 5,007: up 5.7%
• Russell 2000 1135: down 5.7%
• Shanghai Composite 3539: up 9.4%, despite plunging 43% from its intra-day peak on June 12 to the bottom on Aug. 26
• Stoxx Europe 600 365: up 6.8%
• 10-Year Treasury yield: 2.273% (from 2.173% a year ago)
• US Dollar: up 9.3 percent
• Feb Crude $37.07: down 30.5%
• Feb Gold $1,060.50: down 10.7%, lowest since Feb 2010
• AAA Nat'l avg. for gallon of reg. gas: $1.99 (from $2.00 wk ago, $2.23 a year ago)

THE WEEK AHEAD: Hopefully you got some rest over the holidays, because it is going to be a very busy first week of the year, highlighted by the December jobs report on Friday.

Mon 1/4:

9:45 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Tues 1/5:

Motor Vehicle Sales

Weds 1/6:

8:15 ADP Employment Report

8:30 International Trade

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

2:00 FOMC Minutes

Thursday 1/7:

8:30 Weekly Jobless Claims

Friday 1/8:

8:30 December Employment Report

3:00 Consumer Credit

Lessons from Turkey

If you ever need a refresher in how interconnected the global economy is, then take a trip outside the U.S. and if possible, travel to one of the “hot” emerging economies. I was fortunate enough to spend two weeks traveling throughout Turkey (thankfully far from the terrible bombings in Ankara, but more on that later). I arrived in Istanbul just days after the disappointing September jobs report was released and was trying to forget about it, but one of our guides asked me, “What’s going on with the U.S. economy? We thought the Fed was going to raise interest rates and now it’s not?” I can’t be out of the country for three days, without talking about Janet Yellen and the power of the central bank! The Turkish economy, like many other emerging markets, has seen its currency plummet by 25 percent against the US dollar this year (good news for me as a traveler, bad news for me as an emerging market investor), as the Fed hinted that it would increase interest rates. Foreign citizens have been preparing for the Fed shoe to drop, hoping that this time around would not be as painful as past periods like 1981-82, 1994, and 1997-98, when emerging-market companies exploited low U.S. interest rates to borrow heavily in dollars and then when rates increased, had a tough time repaying those debts. Additionally, all of the money that previously had flowed into these countries reversed course and headed back to the U.S. as dollar denominated assets increased in value.

Meanwhile, the dollar’s ascent was rudely interrupted after the Fed decided to hold off. As I explained to the Turkish guide, the slowdown in global growth -- especially in China -- combined with tame prices, is likely to keep the central bank on the sidelines at least until December and maybe into next year. (In a country where inflation was just reported at a 7.9 percent annualized rate, the concept of deflation was a distant one.)

Traveling around Turkey also allowed me to see first-hand the dramatic economic growth, which has been taking place in various emerging markets. Sure, there could be a slowdown in China, Brazil, Russia and even in Turkey, but these are places where a breather would probably be a good for the long term prospects of the local economies.

And while being in a country during a violent event like the bombings in Ankara is not pleasant, it was also a good reminder that despite economic progress, dysfunctional and/or unstable political systems can impede economic success. As one man told me, “This is a terrible national tragedy, but it also makes it harder for the world to think of Turkey as an attractive place to do business and to travel.” And investors would be wise to recognize that geopolitical risk is one that is easy to absorb when things are peaceful, but can easily arise at any time.

One of the great benefits of international travel is the ability to immerse oneself in a culture, its people and for me, to continually learn about the local economy. Still, I am always grateful to return to the U.S., where I appreciate all that we have. Yes, the economy is slowing down a bit and the recovery has not been kind to all; and indeed, corporate earnings could be under pressure this quarter and the stock market has been wobbly; and of course, our political season will make you nuts. But compared with the rest of the world, the U.S. maintains an innovative spirit and general optimism, which should allow it to continue to thrive.

MARKETS: Finally, a two-week vacation and the stock market went UP! Week one was better than week two, but in the absence of any big economic reports this week, corporate earnings will likely dominate market action.

• DJIA: 17,216 up 0.8% on week, down 3.4% YTD
• S&P 500: 2,033 up 0.9% on week, down 1.2% YTD
• NASDAQ: 4,886 up 1.2% on week, up 3.2% YTD
• Russell 2000: 1162, down 0.3% on week, down 3.5% YTD
• 10-Year Treasury yield: 2.03%
• December Crude: $47.72, down 4.8% on week
• December Gold: $1,183.10, up 2.4% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.27 (from $2.32 wk ago, $3.14 a year ago)

THE WEEK AHEAD:

Mon 10/19:

Morgan Stanley, IBM

10:00 Housing Market Index

Tues 10/20:

8:30 Housing Starts

Weds 10/21:

American Express, General Motors, Coca-Cola, Boeing

Thurs 10/22:

AT&T, McDonald’s, Amazon, Microsoft, Caterpillar, 3M

10:00 Existing Home Sales

Fri 10/23:

Procter and Gamble

Week Ahead: Groundhog’s Day for Jobs?

After weaker than expected December jobs data, investors are preparing for the January report, due Friday. In the last month of the year, the economy added 74,000 positions, far below the two-year average of 182,500. Yes, December was a stinker and it may have been negatively impacted by severe weather (the team at Capital Economics believes that “at least half of the slowdown appears to have been due to the unusually heavy snowfall that prevented some people from getting to work and stopped others from conducting business as normal”), but 2013 was pretty good, according to David A. Rosenberg, the chief economist at Gluskin Sheff (h/t NYT’s Floyd Norris).

Rosenberg notes that total employment rose 2 percent last year for a total of 2.26 million new jobs; part timers and those working part-time for economic reasons fell 0.7 percent and 2 percent respectively; the number of people who needed second or third jobs fell 2.2 percent; and job openings increased by 5.6 percent, while layoffs sank 14.3 percent.

These are pretty good results for an economy that grew by just 1.9 percent for the entire year. (On an annual basis, real GDP increased 1.9 percent, but on Q4-over-Q4 basis, real GDP increased 2.7 percent Note: See GDP: Annual and Q4-over-Q4 for the difference in calculations. For the 18 quarters of the current expansion, the economy has grown by about 2.4 percent annually.)

So what about the December problem? Sure, it was just one month and many economists are sticking to the theory that there were some weather related issues. Still, the jobs situation is far from ideal -- employment is still below the pre-recession peak, albeit by less than 1 percent. And the ranks of the long term unemployed (who have been unemployed for more than 26 weeks and still want a job) remain far too large at 3.88 million.

Economists are all over the map with predictions for January’s results, but other indicators, like weekly claims and the employment components of manufacturing and service sector surveys, have shown improvement. As a result, most expect job creation to return to last year’s average rate of about 185,000 for the month. The unemployment rate, which dropped to a five-year low in December, is expected to remain at 6.7 percent.

Weather watchers remind us that it was pretty chilly in January too, so there could be a chill in January’s results. That may be a little Groundhog’s Day-ish for some, but there it is. The BLS will also release its update to previous data, back to January 2009, so be prepared for revisions, especially to last year’s readings.

MARKETS: According to an old Wall Street saying, “As goes January, so goes the year.” Does that mean all is lost for 2014? The statistical support for the so-called “January Barometer” is shaky at best, so let’s not go crazy. US stocks were down for the month, but nearly as much as emerging markets, which tumbled 6.6 percent, according to the broad MSCI Emerging Market Index. Those once high-flying performers have cratered by 22 percent from post-crisis highs in 2011 and by almost a third from the peak in 2007. The downdraft convinced many to bail on the whole lot of ‘em: In this week alone, investors pulled 6.4 billion dollars from emerging stock funds and $3 billion from emerging bond funds. Those panicky investors headed to the safety of US government bonds.

• DJIA: 15,698, down 1.1% on week, down 5.3% in Jan/YTD (worst month since 5/12, worst Jan since 2009)
• S&P 500: 1782, down 0.4% on week, down 3.6% in Jan/YTD (worst month since 5/12, worst Jan since 2010)
• NASDAQ: 4103, down 0.6% on week, down 1.7% in Jan/YTD
• 10-Year Treasury yield: 2.66% (from 2.74% a week ago; best month since 5/12)
• Mar Crude Oil: $97.49, up 0.9% on week, down 0.9% in Jan/YTD
• April Gold: 1239.80, down 1.9% on week, up 3.1% in Jan/YTD
• AAA Nat'l average price for gallon of regular Gas: $3.28 (from $3.46 a year ago)

THE WEEK AHEAD: In addition to employment, the week ahead will feature monthly automobile sales, which likely dipped because of the cold weather and manufacturing and factory data. Investors will be on guard for a fall-off in manufacturing activity after China recently reported a slowdown in growth. On the earnings calendar, social media will be in focus, as Twitter and LinkedIn report results.

Mon 2/3:

Yum Brands

Automobile Sales

10:00 ISM Mfg Index

10:00 Construction Spending

Senate subcommittee holds hearing on recent data breaches at major retailers

Tues 2/4:

Clorox

CBO releases its U.S. economic outlook

Weds 2/5:

Time Warner, Twitter, Walt Disney, GlaxoSmithKline, Merck

8:15 ADP Private Sector

10:00 ISM Non-Manufacturing

Thurs 2/6:

GM, LinkedIn

Chain Store Sales

7:30 Challenger Job-Cut Report

8:30 Weekly Jobless Claims

8:30 International Trade

8:30 Productivity and Costs

Fri 2/7:

8:30 January Jobs Report

3:00 Consumer Credit

Stock Market Drop: Blip or Correction?

All of the sudden, those 30 percent stock market returns of 2013 seem like old news, as investors across the globe have a major case of the jitters. Worries about slowing growth in China, weakness in some US corporate earnings and the Fed's decision to curtail its bond-buying are all factors. But the biggest catalyst has been the unfolding drama in emerging markets, where local currencies have been battered. Countries that have depended on foreign investment – including Turkey, Argentina, Brazil, India, South Africa and Indonesia – are seeing a reversal of fortunes as local central banks finally take steps necessary to address  inflation and account imbalances. The fear now is that investors will pull money out of those countries, as well as other emerging markets, igniting a global sell-off in risk assets.

This latest round of selling has everyone talking about a  correction, or a drop of 10 percent or more from the peak. With yesterday’s sell-off, we are down about 4 percent from the recent peak, so we're not there yet. In fact, it's been nearly 28 months – back to the summer of 2011 – since the S&P 500 has experienced a correction. On average, the index has gone through a correction every 18 months or so since 1945.

Of course nobody knows whether the recent selling is a blip or a harbinger of scary things to come. That's why the best advice for diversified investors, who are adhering to a well thought-out game plan is to SIT STILL AND DO NOTHING. But if you have a bit too much risk in your portfolio, use this market volatility as an opportunity to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here are 6 more tips that I periodically trot out during market gyrations:

1. Dont let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.
2. Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)
3. Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.
4. Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.
5. Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.
6. Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org and to find a broader number of advisors, use the Financial Planning Association's "Find a Planner" tool.

Week Ahead: Bernanke's Swan Song

All eyes will be on the Federal Reserve this week, when the central bank concludes its last policy meeting of the Ben Bernanke era. (Janet Yellen will succeed Bernanke as leader of the central bank on February 1^st.) Before launching into what will happen at the upcoming meeting, it’s worth considering Ben Bernanke’s legacy during his seven years as Chairman of the Federal Reserve. Bernanke presided over one of the most turbulent periods in U.S. economic history and reviews of his performance have varied. Critics note that Bernanke has been a modern-day money printer, who missed the implication and severity of the subprime crisis in 2007. Who can forget his May 2007 comment, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Woops!

But Bernanke fans see him as the savior of the financial system. After recognizing the magnitude of the crisis, he rose to the occasion, according to Martin Wolf of the Financial Times. “Bernanke acted decisively and effectively, slashing interest rates and sustaining credit.” Once the worst of the crisis passed, Bernanke realized that political fighting in DC had made the Federal Reserve the economy’s best hope for recovery. He resorted to extreme measures to prod growth: maintaining short term interest rates at zero and purchasing bonds for the Federal Reserve’s portfolio.

The naysayers contend that although these actions have not yet created inflation, they will down the road. They also say that unwinding these policies under Janet Yellen will lead to destabilizing events across the globe-just take a look at the emerging markets in the last week alone!

How history judges Bernanke will depend in large part on what happens in the next group of years. As the legacy of the Bernanke era develops, there is no doubt that the man will be seen as one of the most important Fed Chairmen in the 100-year history of the central bank.

And now, the week ahead!

At the December FOMC meeting, Fed officials began the process of unwinding their bond-buying program by reducing purchases by $10 billion dollars to $75 billion. Many believe that with economic activity picking up, the Fed may announce another $10 billion dollar cut to $65 billion at this week’s meeting. Others say that the weaker than expected December jobs report may encourage the Fed to hold off until the March meeting.

In addition to the FOMC, the first estimate of fourth quarter growth is expected to show that the economy grew by an annualized pace of 3.3 percent, despite the government shutdown and unusually bad weather. If the consensus comes in on target, the result would be slower than the previous quarter’s 4.1 percent, stronger than the 2013 real (inflation-adjusted) growth of 2-2.25 percent; and equal to the 60-year average.

Just a few weeks ago, economists predicted that US growth in 2014 would finally match the historic norm. The boost would come from an accelerating jobs recovery, waning household debt burdens and the fading of sequestration’s fiscal drag. The combination would encourage consumers and businesses to spend more freely, creating a virtuous economic cycle. That line of thought came under scrutiny last week, after disappointing Chinese manufacturing data prompted a sharp sell off in global equities and emerging market currencies.

As the rosy growth picture dimmed, some worried that companies might err on the side of caution and restrain spending. According to Factset, total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, despite the fact that those companies are sitting atop $2.8 trillion in cash. Of course, corporate plans can shift quickly. If sales and growth pick up more than expected, businesses may go on a mini-spending spree.

MARKETS: Just a week and a half ago, the S&P 500 reached a new all-time high. Last week, worries about slowing growth in China, an emerging market melt down (led by a potential currency crisis in Argentina and exacerbated by the eventual withdrawal of Fed stimulus), and weakness in some blue chip earnings, sent stocks lower. Investors may have forgotten the word volatility, but before we get too nutty, the S&P 500 is now off 3.1 percent from its all-time high on Jan 15^th. The classic definition of a correction is a drop of 10 percent or more from the peak. Meanwhile, risk-averse investors piled into highly rated government bonds (US and Japanese).

• DJIA: 15,879, down 3.5% on week, down 4.2% YTD (biggest weekly drop since 11/11)
• S&P 500: 1790, down 2.6% on week, down 3.1% YTD (biggest weekly drop since 6/12)
• NASDAQ: 4128, down 1.7% on week, down 1.2% YTD
• 10-Year Treasury yield: 2.74% (from 2.83% a week ago and a 7-week low)
• Mar Crude Oil: $96.64, up 2.1% on week
• April Gold: 1264.50, up 1% on week
• AAA Nat'l average price for gallon of regular Gas: $3.29 (from $3.32 a year ago)

THE WEEK AHEAD:

Mon 1/27:

AAPL, Caterpillar

10:00 New Home Sales

Tues 1/28:

AT&T, Ford, Pfizer, Yahoo

8:30 Durable Goods Orders

9:00 Case-Schiller Home Price Index

10:00 Consumer Confidence

Weds 1/29:

Boeing, Facebook

2:00 Fed Meeting announcement (no press conference)

Thurs 1/30:

3M, Altria, Amazon, Colgate, Exxon Mobil, Google, UPS, Visa

8:30 Weekly Jobless Claims

8:30 Q4 GDP (1^st estimate)

10:00 Pending Home Sales

Fri 1/31:

Chevron, Master Card, Mattel

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment

Sat 2/1:

Janet Yellen becomes Fed Chair, the first woman to do so

Sun 2/2:

A football game will be played in NJ

Week ahead: Will emerging markets tank US investors?

Forget about the NASDAQ trading suspension. The big story of last week was (and will continue to be this week), emerging markets. During a slow summer week, attention turned away from the US and towards India, Indonesia, Turkey and Brazil. These once-sizzling markets are suffering large currency declines, which have prompted many of their central banks to announce intervention efforts to prop them up.

Guess who’s to blame for the foreign fiasco? Yes, the US central bank chief Ben Bernanke is the goat once again. Emerging markets had been big beneficiaries of the Fed’s low interest rate policies since the financial, as yield-hungry investors sought better opportunities than the zero percent US environment. So in May, when Bernanke said that the Fed might taper its bond purchases, it also meant that many of those emerging market investors would yank their funds and return to the US.

Indeed, many have had enough of the international roller coaster. Since the beginning of June, retail investors have withdrawn $18.1 billion dollars from emerging market bond funds, about one-third of the amount they had put in since the era of low interest rates began since the financial crisis (WSJ). Adding to the pain, institutional investors have pulled about 10 percent of their pre-crisis investments. The anxiety is seeping into all global markets. Last week, stock exchange-traded funds and global equity funds saw their first net outflows in eight weeks and the largest in five years.

Chances are, the nerves will persist until the Fed pulls the taper trigger, perhaps as early as the mid-September meeting. Until then, investors who remain in town this week will keep an eye on the Durable Goods Orders report and the first revision to Q2 GDP, which most expect to increase to 2.2 percent from the originally-reported 1.7 percent. The strengthening economy would help the Fed’s case for tapering sooner rather than later.

MARKETS: US stock indexes were mixed on the week and many expect another low volume, pre-holiday week ahead.

• DJIA: 15,010, down 0.5% on week, up 14.5% on year
• S&P 500: 1663, up 0.5% on week, up 16.6% on year
• NASDAQ: 3657, up 1.5% on week, up 21.1% on year
• 10-Year Treasury yield: 2.82% (from 2.83% a week ago)
• Oct Crude Oil: $106.42, down 0.8% on week
• Dec Gold: $1395.80, up 1.7% on week
• AAA Nat'l average price for gallon of regular Gas: $3.54

THE WEEK AHEAD:

Mon 8/26:

8:30 Durable Goods Orders

10:30 Dallas Fed Mfg Survey

Tues 8/27:

9:00 S&P Case-Shiller Home Price Index

10:00 Consumer Confidence

10:00 Richmond Fed Manufacturing Index

Weds 8/28:

10:00 Pending Home Index

Thurs 8/29:

8:30 Weekly Jobless Claims

8:30 GDP (2nd estimate)

8:30 Corporate Profits

Fri 8/30:

9:00 Personal Income and Outlays

9:45 Chicago PMI

9:55 Consumer Sentiment