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No Valentine From The Market

February 16, 2016

 

There’s not much love {in the markets} this Valentine’s Day. Even if the January equity slump resolves itself, investors face another tough year. 

In 2015, the S&P 500, including dividends, slumped to only 1.4%. Total returns for a basket of smaller companies were negative: for Russell midcap stocks, -2.4%; small-cap stocks, -4.4%. The ten-year Treasury bond returned only 1.1%, below many measures of inflation. And 2016 has started so badly that it could turn out to be worse than 2015 unless government policies change drastically.

Geopolitically, the news isn’t cheerful. Saudi Arabia and Iran have moved closer to armed conflict. North Korea claimed it exploded a hydrogen bomb. Europe is struggling to absorb millions of Syrian refugees. Most Americans believe that ISIS is a threat to the US.

And, the US presidential campaign of 2016, is shaping up to be another one for the books. 

This year began on a bad note, but markets look ahead. If they see policy improvements on the horizon, there will still be time to salvage 2016 for investors.

Billy and I are in Boston this week visiting my sister. I’m reminded why I left New York for California six years ago: even when the sun is shining, it is still SO cold here! Similarly, there is a lot to be optimistic about in 2016, even if January was the worst start to a year, ever.

Packing for our trip, I packed my laptop, two Kindles, two cell phones, a Fitbit, a neat charging device that charges up to six devices at a time, and a USB with five different cable ends to it. 

Optimistic Point #1: Digital is how we do things now, but digital isn’t just tablets and clever phone apps. It’s now about driverless cars that will reduce car deaths, commercial drones that will make agriculture more efficient and feed more people, robots that will take on dangerous jobs, and watches and wristbands that will monitor our physical health. The Internet of things means just that – real things, not just bits, bytes, and pixels.

Optimistic Point #2: New technology also means jobs will continue to grow. Despite a below-consensus headline payrolls number (+151K vs. +188K), trend growth remains solidly above 200K, the unemployment rate fell to 4.9%, wages rose 0.5% (up 2.5% on the year), and the participation rate climbed for a third consecutive month.

Optimistic Point #3: Job growth means American stocks won’t collapse. Since the stock market bottomed in March 2009, we’ve already gone through one bear market (20% drop from previous highs), in 2011. Another shouldn’t surprise.

Optimistic Point #4: China’s economy won’t implode. China’s actual economy has slowed from 8% to 10% growth in recent years to 6%. Its industrial sector has slowed even more. But software and services (See Point #1) and the country’s internal entrepreneurial and consumer economies are doing nicely. 

Optimistic Point #5: Presidential candidates will eventually debate taxes and regulations. As the race winnows down the Republican field, real economic policy will make its way to the stage and a Democratic candidate will eventually have to come out to debate a toughened-up GOP candidate.

So, while the market isn’t showing us much love this year-to-date, we have plenty to be optimistic about, and we are always happy to discuss things further with you in person or virtually. 

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