First, we want to thank all of you for the nice cards and kind words that were conveyed to us on the passing of Seth. He was a pioneer in the industry and a true visionary when it came to building this integrated team that will live on for years to come. It is very rewarding to see the relationships that we have developed with all of you over the years. Our mission has always been and will always be, “to help improve the lives of those we serve.”
Now, as the world starts to digest the vote for the U.K. to leave the European Union, it’s clear that the surprise of the “Brexit” vote added to the volatility of the market. The market had rallied before the vote, since a “stay” vote was all but expected. Yet, as we all know too well, oftentimes what is expected can quickly turn into the unexpected when it comes to the stock market. We saw a move up of close to 500 points in the Dow Jones Industrial Average in the week leading up to the vote, only to go down 850 points in the 2 days after the vote, then to erase the losses over the next 4 trading days!
Regarding “Brexit,” we suggest that everyone just takes a deep breath. Jim Paulson, from Wells Capital states, “It’s not like the U.K. is going to remove itself from the world economy and not trade with anyone. Once the emotion of this event fades, investors may get back to fundamentals, which at least in the U.S., are looking better.”
As the 2nd quarter of 2016 ends, the U.S. Stock Market, as represented by the S&P 500 Index, is slightly positive. It’s been a strong rally back to positive territory after a roller coaster ride through the first few months of the year, when the first 6 weeks took the Index down over 11%. On the bond side, we have an interest rate environment that continues to remain at very low levels. In fact, the 10 Year U.S. Government Bond yields have dropped from close to 2.24% at the beginning of the year, to close to 1.40% today. Clearly, not what one would have expected when last December the Fed made the first move to raise interest rates in nearly 10 years.
It’s clear that volatility will continue in the stock market. The Federal Reserve is still hanging over the market with the notion of 1 or 2 increases in interest rates this year. We have growth around the world slowing, yet here at home the economic data has been okay. The unemployment rate remains low at just under 4.7%. GDP growth for 2016 is still targeted to be close to 2% ‐ 2.5%, although that has been trending to the lower end as of late. A GDP of 2.5% has been the average for the last 7 years, which is below the longer run average of 3.5% a year.
It is important to remember that the U.S. Stock market returns over time are driven by corporate earnings. According to a new report from the rating agency, Moody’s, the health of those very companies seems to be strong, with U.S. companies cash pile hitting a record $1.7 trillion! And did we mention that the presidential election should certainly help add some volatility to the market as well?
Yet, with all this said, our conviction for keeping a long term balanced portfolio has not wavered. It’s impossible to time the market and react to the day to day reports on the state of the economy. John Bogle, founder of Vanguard Group, once said that the daily moves in the market are a “crazy game in that busy casino” and we could not agree more. That’s why we have long been proponents of the low cost Vanguard Index Funds. Changes in a portfolio should be driven by changes in your personal situation, risk level and income needs, not by the latest report of who will win the White House in November.
Attached we have provided a performance update of the Vanguard Equity Index Funds that we recommend, as well as the Vanguard Fixed Income Funds. These are the core building blocks for a low cost balanced portfolio. We have also attached a piece on the “Risk of Stock Market Loss Over Time.” As illustrated by this handout, of the 90 one year holding periods from 1926 to 2015, 24 have resulted in a loss. However, you will notice by increasing the holding period to 15 years, none of the 76 overlapping 15 year periods resulted in a loss. Be sure to keep in mind, holding stocks for the long term does not guarantee positive returns.
Please do not hesitate to call should you have any questions at all or if you would like to discuss your individual portfolio. We hope that everyone enjoys the summer with friends and family.
Bryan Bastoni, CFP
CERTIFIED FINANCIAL PLANNER, TM