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The Cornerstone Investment Commentary: End of Year 2015

Happy New Year!  If not for the so-called FANG stocks (Facebook, Amazon, Netflix and Google – all trading at ‘tech-bubble’-type prices), the S&P 500 would have joined other major stock markets and sectors with a loss in 2015.  It’s a situation not unlike someone who cut back on their favorite fatty foods and still gained a little weight:  Doing everything right still landed you a bit behind where you started the year.

Some bonds managed a 1-2% return – just not the ones faring best previously.  In a year that gave us small gains by Spring, big mid-Summer declines, a nice Fall rally back to positive growth and a December swoon giving some of it back, sometimes staying close-to-break-even when others give ground is an achievement (even if a frustrating one).  Quite a few areas lost quite a bit of ground in 2015.  Excluding the largest U.S. companies, equities dropped about 5%; overall, so did foreign overall.  Higher-dividend stocks fared even worse (utility stocks fell 12%) with rising interest rates on the horizon, and the bottom fell out of both commodity and most energy-related stocks.  Only technology stocks and real estate beat inflation by any noteworthy amount.  Indeed, your portfolio would have fared worse had we not lowered your overall stock market exposure, eliminated commodities and reinstated real estate nearly two years ago.

Primarily, this challenging environment is being caused by a slowdown in the growth of corporate profits plus concerns about several strong headwinds to this challenging economic landscape:  the return to gradually rising interest rates, a strong U.S. dollar, a small uptick in wage growth amid continued labor market tightening, anemic growth in Europe and Asia and the challenges caused by lower commodity prices and economic growth in China, Brazil and many emerging economies in general.  It’s also why the U.S. economy struggles to shift into a higher gear (and partly why inflationary pressures remain very low).

While we believe your portfolio is properly positioned based on your objectives and today’s conditions, and our retired clients’ income remains solid under their withdrawal policies, there are several steps to take:

  • Capture losses for tax purposes in after-tax assets where practical (already completed by 12/31/15)
  • Further lower emerging markets positions by ~1/3, often by selling Aim Developing Markets Fund (GTDYX), in favor of adding to indexed holdings in the U.S. large-cap growth asset class
  • Achieve a more even overall split between your U.S. growth and value stocks

We will implement these steps in the next month.  Should our thoughts change on the current situation, we will certainly act accordingly and be in touch.  We both welcome and look forward to any questions you may have.  All of us at Cornerstone wish you a good start to what we hope will be a year of health, happiness and meaning for you.  As always, we thank you for the continuing opportunity to work together.