So far this year, we’ve heard discussions and questions surrounding recessions, depressions, China, oil, and of course, elections. Which side of the aisle do you find yourself towards? Not the elections, but the reason for January being the worst 10 day start to a year in S&P 500 history (Standard & Poors Factset, J.P. Morgan). “China’s economy is slowing”, “Oil is crashing”, “It’s an election year” are common laments for we’ve heard for reasons the stock market falling. Have you found yourself reading, saying or listening to these statements? Arguably, they could all be correct, but as Winston Churchill profoundly noted, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Have you ever wondered how Warren Buffett became such an astute investor? Now he’s a bestselling author. He’s made a career of weeding out the negative sentiment on the investments he’s made. Mr. Buffett is an advocate for investment into companies that interest him personally and pay a higher than average dividend income. However, the thing I think Mr. Buffett has done well, so often, is recognizing excellent buying opportunities. He personifies the popular proverb, “Great opportunity is brilliantly disguised as great risk.” Mr. Buffett is a small town man who knows the basic premise of investing is to buy low and sell high.

Most investment professionals I talk to believe we maybe on the brink of a low return environment for the next 3 to 5 years. I share a similar sentiment. If your financial professional is not talking to you about this possibility, then you may want to start that conversation or seek the opinion of another financial professional. Most people have heard of (quite possibly too often) the term “bond bubble.” However, most do not understand the difference between a corporate bond, a treasury bond, a municipal bond or a savings bond. Regarding bonds, we need to understand the basic, inherent risks of bonds (as seen on Interest rate risk, credit risk, duration risk, reinvestment risk, ratings downgrade risk, liquidity risk and default risk. By no means should these risks alone steer anyone away from investing in bonds, but it should lead you to a better understanding of the “ins and outs” of bond investments and how they function. At the end of the day, from a client’s perspective, the goal of hiring a financial professional should be to increase investment growth, maximize income potential, manage risk, or a combination of all three objectives. In today’s world, many are choosing to do their own investing which is understandable and acceptable to those who are fee averse. Each investor should use caution when investing and should be clear what their risk tolerance is.

James Byrnes famously said, “Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.” I can see the correlation to this quote within investments, yet I can also see the justification for safety. Throughout my career, it seems everyone becomes cautious after the markets pull back. Ironically, this is backwards if we apply logic. The way I see it, the time to be cautious is when markets are high, and the time to be opportunistic is when the markets retract. With the baby boomers now retired or retiring, it’s understandable that they would shift to a more conservative investment approach. My warning to those investors, don’t measure risk merely by stocks (equity) and bond (fixed income) comparisons. For many investors, you may want to consider taking a contrarian approach on certain asset classes. Like Buffett, make sure you understand the investments you’re buying and the industry as a whole. Again, in my opinion, over the next half-decade this could potentially be a “stock pickers” environment. Broad-based, passive investments could potentially underperform in these heightened volatility years. In fact, my outlook for US equities is mid-single digit annualized returns. Unfortunately, my outlook for bonds is not much better as I foresee low single-digit to zero annualized returns.

You may ask me, “Are we in a recession, depression or are we just experiencing volatility?” This is a good debate. The answer is, none of us really know. Many factors will transpire over the next few years that could lead to any scenario possibly being correct. For now, I believe markets are experiencing volatility. As a reminder, since 1980 the historical intra-year stock market pullback is roughly 14% (Standard & Poors Factset, J.P. Morgan). This means, on average, the stock market pulls back 14% at some point during the year. As of this writing, February 21st, we find ourselves having experienced roughly a 12% contraction in the Dow Jones and the S&P500 since their recent highs in November 30, 2015. I contend we are in a period of high uncertainty. We are in the middle of an election year, we have 100% debt to GDP (Gross Domestic Product) ratio, and a national debt that exceeds $19 trillion and we’ll continue to run a deficit annually. Furthermore, our GDP growth has been historically low for the several years. However, these are economic measures not market measures. Market-wise, we have seen historically high corporate profits, historically low corporate debt, a healthy employment rate (the U-3 rate), and an outlook for expanding national exports.

To conclude, my advice is to determine your goals and risk tolerances. Secondly, remove the emotion from investing. If you cannot do that yourself, I would advise you to consider hiring a financial professional. Next, consider buying when down and selling when up, not vice versa. Diversity between asset classes, risk classes, time horizons and currency positions should be considered based on your risk tolerance(s). Caution yourself that correlation between investments can potentially increase risk and/or decrease returns. In the immediate future, over the next 18 months or so, I believe the oil business and the energy sector will grow. Next month we will review potential new legislation surrounding investment accounts.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing involves risk including loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful