Download HFG 2015 Review and 2016 Outlook

HFG 2015 Review and Outlook 2016
2015 is nearly in the books and many are eager to see it in the rear view mirror. The U.S. and global economy
faced numerous and varied headwinds in 2015 from the first real correction to US stocks since the summer of
2011 to an unforeseen and significant drop in the price of oil. December has also found us in a junk bond
correction and the Federal Reserve raising the Fed Funds Rate from the nearly zero level to which they took it
during the financial crisis. Indeed, many of the economic and market influences of 2015 were residual effects of
the great recession of 2007 – 2009. A lot to have gone through and a lot to still sort through.
2015 in Review
Economic drift is a phrase that comes to mind when reflecting on 2015. The US and global economy
experienced continued slow growth interspersed with signs of deceleration. When U.S. and global GDP rates are
in the low single digits, any sign of slowing will result in an outsized market response. This explains the volatility
of equity markets in 2015. Specifically, continued signs of slowing growth in China and lack of GDP leadership in
the U.S. sparked the first real equity correction seen in the U.S. since the summer of 2011. This correction shook
many investors’ resolve and injected heightened volatility into equities for the balance of the year. It is
important to keep such corrections in perspective as they have historically arrived an average of two times a
year. Count on them showing up.
The post-recession economic recovery is into its seventh year. This alone will reasonably lead to greater
volatility given that the average business cycle has historically run 4 to 6 years. The end of a growth cycle is not
necessarily cause for great concern nor should it shake the resolve of the long term investor. However, given
the new normal of continuous perceived frailty of global economics, one can expect markets to be highly
sensitive to anything that indicates a slowdown in economic activity. This sensitivity will likely continue until the
data show signs of expanding growth.
2015 also saw the ongoing correction of industrial commodities prices as excess supply weighed on nearly every
category. Indeed, oil, the mother of all commodities, saw an unexpected and severe correction which may still
not have reached its inflection point. The influence of this correction has been felt immediately by the energy
and related sectors as well as the overall stock market. This has spilled over into a concurrent correction in junk
bonds which has, in turn, complicated the outlook for the energy sector. All of the commodity sector issues can
be summed up in the simple statement that supply has significantly exceeded demand and, until we trend back
toward closer balances of such, prices will continue to be low or correct. This excess or “slack” as it is often
referred to is one of the greatest contributors to muted inflation. Both may be with us for a while.
2016 Outlook
More Modest Growth
Slow growth in China and the U.S., rising interest rates, slowing global capital investment, a correction in
commodities, a correction in the junk bond market, an aged economic cycle; these and other headwinds face
the economy as we make our way into 2016. It would be foolish to dismiss any one of these challenges as
insignificant and certainly to dismiss them in concert. However, a murky or challenged outlook does not mean
we are in for an outsized correction in the economy or markets. The US and global economy have never grown
in a steady straight line and they never will. Setbacks are a guaranteed ingredient of the economic and
investment experience. Having said this, there are a number of good signs within U.S. economic data that also
cannot be easily dismissed. The U.S. consumer has continued to show resilience as seen in home and auto sales
figures. Lower energy prices may mean short term pain for those employed in the energy sector but long term
benefits exist for nearly every U.S. citizen. Lower heating, electric and transportation costs have already
contributed to the bottom line of many businesses and households and look to continue to do so throughout
2016. Energy expense is one of the largest for individuals and industry. Lower costs here have the potential to
mean greater spending in other areas that generate broader economic impact. Slack in other areas of industrial
commodities have the potential to create an additional positive impact for manufacturers and have the possible
added benefit of an increase in hiring and wages. On balance, we think the table is set for modest growth. It is
our opinion that we are at a crossroads of opportunity for stimulative fiscal policy. We will be watching and
listening closely to developments in Washington in 2016.
Rising Rates
The specter of rising interest rates has been hanging over the markets for months if not years. Yes, rising cost of
capital has the potential to curb borrowing and, consequently, consumption and investment. Not always and, in
my opinion, not until we are at much higher rates that ~0%. I have seen the economy expand more than once in
the face of rising rates during my career. In my opinion, it is likely that, once the Fed has raised rates and we see
little to no impact on the broader economy, this perceived threat to growth will move well down the list of
concerns. Chairman Yellen has made it overwhelmingly clear that the Fed intends to embark on a very slow and
patient tightening policy. In the end, though there will be periods of volatility along the way, I think the ultimate
impact will be relatively insignificant to the economy and the bond market. We have been talking about and
waiting for higher rates for years. Sometimes you need to look the boogie man in the eye to realize he is not so
scary and move on. I think we will.
Market Levels
Equity market levels are a constant source of editorial on 24/7 financial news networks and on the internet. This
has been and will be the case. Realistically, if financial media outlets focused on sound long-term asset
management strategies, they would lose the urgency that they tend to weave into every subject they cover. It is
far more productive to them to dwell on the anxieties of the moment and infer by this focus that you should be
taking some form of action to deal with them. It occurs to me that they are of far better use in testing the
effectiveness of one’s blood pressure medicine that in providing genuine value added to the individual investor.
This aside, market levels are stalled here and have retreated from their highs due to uncertainty surrounding
growth. This stalled nature will bode well for 2016 if we see reasonably expanding GDP and corporate earnings.
We may indeed retreat from current levels if such data go measurably in the other direction. At this time, the
consensus opinion of the research sources we utilize is that this will not be the case but rather that we are likely
to experience another year of modest growth.
Strategy
During flat or negative markets, the temptation that investors feel to make changes to their portfolios can seem
overwhelming. They can feel overcome by the need for change when the very best strategy is often to stay the
course and persevere through difficult markets and ugly headlines. Markets will have flat and negative years
that cannot be removed from the investor experience. Pursuit of avoiding such invites dangerous strategies that
risk making one’s experience much worse. As in many important aspects of our lives, discipline and patience,
the hardest of practices, are the most important and successful. The outlook for average returns on balanced
portfolios range from low to mid single digits for the next few years. If one seeks to “time” the good periods and
misses them, their average will be far less. There is no formula to predict or navigate them so durable
allocations and perseverance continue to be the ingredients of long term success and the foundation of portfolio
construction here at HFG.
It is always important to understand the details of one’s asset allocation and security strategy to reinforce that
both are wisely composed for the long term. Once confirmed, the best strategy is to let the powerful variable of
time unfold. Where a financial plan has been composed, reference to its time tested conclusions is also wise.
The HFG team is eager to revisit each of these subjects with you at any time.
Please bookmark our website at www.halleranfinancialgroup.com. We provide updated weekly information and
commentary to provide you with our perspective on an ongoing basis. We are in the process of rolling out a
new look and organization to our website in 2016, stay tuned.
Finally, a thank you. 2015 was a challenging year for my family as we moved forward without my father, John H.
Halleran, Sr. at the helm of the family. We went through all of the ‘firsts’ that those who have experienced loss
know so well. I want to thank you for your kind words of support. I also want to thank you for your support of
the “Healing Place” project at the Honeoye Falls-Lima high school. A new page will soon be added to the HFG
website summarizing the journey to the sites completion in 2015. Please look for this as well as updates on my
involvement as a board member of the Golisano Children’s Hospital and the amazing things that are happening
there. We could not support these important local assets without you.
Thank you and Happy Holidays,
John
John H. Halleran
President and CEO
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor.
Member FINRA/SIPC. Content in this material is for general information only and 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.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not guarantee
protection against market risk. The economic forecasts set forth in this discussion may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.