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The Cornerstone Investment Commentary: 1st Quarter, 2016

If, for some reason, you completely disconnected from all financial and economic news for 2016, you might conclude it was a rather quiet three months which ended with small, positive returns. Though only partially true, this assessment shines light on the notion that checking your portfolio frequently can lead to more emotional volatility than the financial ups and downs themselves.

In fact, the sharp early declines were more than offset by the strong rally which then prevailed through quarter-end. It was (yet another) over-reaction: this time, that slow global growth (and China’s economy only expanding 6-7%) and Federal Reserve rate hikes, falling energy prices and a strong U.S. dollar would shrink U.S. corporate profits. Thus, global equity markets fell 10% until further job growth and wage gains revealed these fears as overblown. This aided consumer spending even as energy prices’ precipitous drop seems to have ended (at least temporarily). All this gave the Fed pause that its rate hikes were premature, and they have since been creating ‘wiggle room’ to delay implementing their previously-announced plans.

More specifically, it was encouraging to see – at least for this quarter – the most attractively-priced equity asset classes fared best. Overall, U.S. stock market equities outperformed their overseas counterparts due to the relative strength (and resiliency) of the U.S. economy compared to the rest of the developed world. Alas, so far so good for the changes we made earlier this year. Whether this remains the case depends on these results continuing – and translating to corporate profit growth, especially since Europe continues to rule out stimulating its economy with fiscal policy (tax cuts and/or increased public spending) and now has the challenges of Syrian migrants and the horrific aftermath of the recent terrorist attacks on its plate.

Bond market performance was noteworthy. Yet again, intermediate and longer-term U.S. Government bonds rose when stock markets declined. This isn’t really surprising; they are the best ‘safe harbor’ for parking money in such ‘storms’. However, in the face of expected interest rate rises, this matters since such increases usually cause bond prices to fall. Because financial markets seem more precarious – especially as stock markets have recovered recent losses – and with the Fed delaying interest rate action, it is prudent to increase your portfolio’s government securities by 20-25% and reduce shorter-term bond positions in turn. To do so, we need only add to existing holdings in coming months. As a result, government bonds will comprise 25-35% of your fixed holdings with the rest remaining in the short-term bond area.

With such changes, we believe you remain well-positioned given the somewhat-shifted winds of the global economy and financial markets. We also remind you that while your allocation to stocks continues to be about one-tenth less than our allocation several years ago, we believe it appropriate to restore this equity position should stock markets fall sufficiently. We will continue to keep you apprised of changing conditions that may warrant further adjustments and thank you for the continuing opportunity to work with you as our clients. Have a wonderful Spring and start to your Summer!