2016, a Year of Surprises……and Will 2017 be Another Year of Surprises?

January 01, 2017
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As we review and reflect the events of 2016, my first comment is…wow, what a year.  The year 2016 began with what has been termed the worst six week in equity market history—the S&P 500 Index declined more than eleven percent from its 2015 close through February 11th.  In June, the market went down nearly six percent in a (trading) day and a half following the Brexit vote.  And there was a moment, somewhere around 2:00 a.m. eastern time after the presidential election, when we saw the futures on the Dow Jones Industrial Average down 800 points! (Thank heaven this didn’t happen during the regular trading day.)  Yet despite all that unnerving market volatility, the S&P 500 closed out the year at 2043.94  With dividends of about 2.1 percent, the market’s total return this volatile year was 10.80 percent.  In a sense, then, the equity market put on a tutorial in 2016, highlighting the wisdom of tuning out shocking current events and the attendant volatility.  During such episodes, it seems to us that the best investment advice we can offer is always, “Turn off the television.” 

There can be little doubt that the major market imponderable in the last third of the year was the U.S. presidential election.  Indeed, the pall of uncertainty was so heavy in the run-up to the voting that the S&P 500 managed to close lower on nine straight days—a feat it had not accomplished since 1980.  Thus, the most important aspect of the election from the market’s perspective may simply be that it’s over.  We know the outcome, and that’s no small thing.  Because in our experience, what the equity market hates most is uncertainty.  It can deal with anything, as long as it knows what it’s dealing with. 

What May 2017 Bring? 

While We believe that the main thrust of our new President-elect is pro-growth, as we commented above, there remain many uncertainties as we begin 2017.  While it is clear that our new President-elect wants to accelerate economic growth, but this policy prescription has not always been clear.  Will he re-negotiatelong standing trade agreements, cut back immigration quotas and deport millions of workers who crossed the border without a visa?  Will there be a wall built between the U.S. and Mexico?  Will the government pay for huge infrastructure projects, at the same time reducing taxes and thus raising the national debt?  Will Congress raise the debt ceiling without protest if that happens?  Will the Fed raise interest rates more aggressively in the coming year, or cooperate with the President-elect in his efforts to drive the economy into a faster lane? 

At the same time, there are many unknowns around the globe.  China’s economic growth has stalled for the second consecutive year, and you will soon be reading about a banking crises in Italy that could force the country to leave the Eurozone---potentially a much bigger blow to European economic unity than Brexit or a still possible Greek exit.  Russian hackers may have ushered in an era of unfettered global intrusions into our Internet infrastructure, and there will surely be a continuation of ISIS-sponsored terrorism in Europe and elsewhere. 

It is not at all a political or partisan observation but a simple statement of fact that the incoming presidential administration, enjoying solid majorities in both houses of Congress, is likely to pursue more pro-business, pro-capital, pro-growth policies than the other candidate might have.  Everything being equal—which it almost never is—we believe these policies should tend to be favorable to the long-term investor. 

It will be worth repeating in the context of this year-end letter, the nature of our philosophy of advice.  Generally speaking, our experience has been that successful investing is goal-focused and planning driven, while most of that failed investing we’ve observed was market- focused  and performance driven. 

Conclusion and Summary 

Another way of making the same point is to tell you that in our experience the really successful investors we’ve known were acting continuously on a plan—tuning out the fads and fears of the moment—while the failing investors we’ve encountered were continually (and  randomly) reacting to economic and market “news.” 

Most of our clients—and I certainly include you in this generalization—are working on multi-decade and even multigenerational plans, for such great goals as education, retirement and legacy.  Current events in the economy and the markets can be in a sense distractions of one sort or another.  For this reason, we make no attempt to infer an investment policy from today’s or tomorrow’s headlines, but rather align client’s portfolios with their most cherished long-term goals. 

Our essential principles of portfolio management in pursuit of our clients’ most important goals are fourfold.  (1) The performance of a portfolio relative to a benchmark is largely irrelevant to financial success. (2) The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals. (3) Risk should be measured as the probability that you won’t achieve your financial goals.  And (4) investing should have the exclusive objective of minimizing that risk to the greatest extent practicable. 

What we have learned over the past few years is that the markets have ways of surprising us, and that trying to time the market, and get out in anticipation of downturn, is a loser’s game. At the county fair, when we get on the roller coaster, we don’t bail out and jump over the side at some scary point on the track; we hang on for the ride.  The history of markets has been a general upward trend that benefits long-term investors, and looking out over the long-term---and a few hard bumps along the way---is probably the best outcome to expect. 

Once a client family and we have put a long-term plan in place—and funded it with the investments that seem historically most appropriate—we rarely recommend changing the portfolio beyond its regular annual rebalancing.  In brief, our principal is: if your goals haven’t changed, don’t change the portfolio. Our unscientific sense is that the more often people change things, the worse their results become.  I agree with Nobel Prize-winning behavioral economist Daniel Kahneman, when he said, “All of us would be better investors if we just made fewer decisions.” 

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.  No strategy assures a profit or protects against loss.

Sources:

The following sources were used in this report compilation: Nick Murray Interactive, Morningstar, S&P 500 Index, Bob Veres Inside Information, market watch, Forbes.com and The World.com

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