This year has been an interesting one for the markets. The major US stock market indices spent the first 8 months of the year trading in a narrow range as economic data and corporate earnings were mixed, commodity prices slumped and the fed sat poised to raise interest rates for the first time in a decade. Then August brought a turndown in US stocks as a mini crash in China sparked fears that the world would fall into global recession. With that came a return of volatility which has since subsided but has left the market nearly flat for the year as investors look cautiously ahead.
Domestic economic data remains strong enough to support the Fed’s decision to finally raise rates. The big question for 2016 is how much will rates increase and what affect it will have on investor returns. Our bond mix remains positioned in shorter duration bonds that are better positioned against a rising rate environment. We also removed our floating rate fund which tends to be lower quality debts. The high yield bond sector has been in the news recently as a couple lesser known funds have had to liquidate due to extended losses. High yield bonds in general have taken a beating this year and to us the space remains unattractive on a risk/reward basis. Although an increase in rates is widely thought to drag on the performance of the stock market, a gradual normalization of rates shouldn’t have a significant impact. As the normalization of rates takes place, we will continue to evaluate our bond positioning so that we are taking appropriate risk given the changing environment.
Domestic equities continue to show signs of improvement albeit at a very slow pace amidst a flurry of merger and acquisition activity. Companies that are directly tied to commodity prices have continued to slump with oil now hovering near 2008 lows due to concerns that the global supply glut is worsening and that we may be entering a longer period of low oil prices than previously thought.
Internationally, developed markets have continued to use easy money policies in the hopes of spurring growth. Accommodative central bank policies coupled with low commodity prices should help improve the economies of developed markets. Emerging markets have been another story. Although emerging markets have calmed a bit since this summer, all markets were not made equal. While China has stabilized somewhat, Brazil and Russia continue to deteriorate. For those reasons, we continue to favor international developed equity over emerging markets.
Because 2016 looks to be just as challenging as 2015 has been, we are making some fund changes to strengthen our current positioning. In the US equity space, we are shifting to our style mix by further overweighting growth funds to take advantages of the current valuation discount compared to value style funds. We are shifting more into international equity, where we are overweight developed large companies over small ones. Although already underweight, given the current headwinds, we are not changing our emerging market exposure. For fixed income, we have increased credit quality by removing our floating rate fund and we remain positioned in shorter maturities and duration. The biggest change came to our alternative space, where we eliminated some of the more volatile funds in favor of a more conservative approach.
As always, we continue to review changes in the market closely. We evaluate the performance of our fund selections on a daily basis. We also pay close attention to all of our funds, in order to stay abreast of any changes made to their management team and/or management style.
Diversification through an asset allocation strategy is a useful technique that can reduce overall portfolio risk and volatility. Diversification does not eliminate risk, does not guarantee a profitable investment return, and does not protect against loss. Past performance is no guarantee of future results.
If you have any questions or concerns, please do not hesitate to contact me directly at (925) 659-8007.