Daily Archives: January 5, 2016

Personal Notes

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THINGS ARE BETTER THAN THE NEWS MEDIA WOULD HAVE YOU BELIEVE. Modern media is overwhelming pessimistic. They focus on sensationalism, scandal, gossip and tragedy. Modern news and media outlets “preferentially feed us negative stories because that is what our minds pay attention to.” Apparently there is a good reason for this; our senses bring in far more data than we can possibly process, and, because survival is the most important driving factor in our evolution, this data is fed first through an ancient sliver in the temporal lobe called the amygdala. The amygdala is our early-warning detector, sorting through data to see what might harm us. It is therefore entirely explicable that we preferentially look at negative news, and almost as obvious that profit-driven media outlets would capitalize on this instinct.

How and why the world is going to become a better place? Highly respected forward thinkers have studied trends and see a bright future particularly due to exponential technological growth. These trends show how life expectancy, global connectivity, access to resources and general quality of life are all on an upwards curve.

HAVE A HAPPY, HEALTHY & PROSPEROUS NEW YEAR!

Heads Up!

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We believe the job of economic forecasting is very difficult. In an effort to create a base line (which we will update throughout 2016), let’s take a look at what a widely read magazine, “The Economist” has to say on the topic of the 2016 Global Wealth Forecast:

“EMERGING markets have given the global economy most of its muscle since the recession ended in 2009. But in 2016 rich countries will account for their largest share of global growth this decade. The BRICs are in a sorry state. Brazil’s government has been both incompetent and corrupt. Russia’s has been no better, with a dose of military malevolence thrown in. China will perform reasonably well in 2016—if you believe the government’s numbers. By that reckoning, its GDP will rise by around 6.5%. The reality almost certainly will be lower. China is mired in debt and has mismanaged its currency and stock markets, sending shocks through the global economy. India looks perkier: it will grow by more than 7%. But that is worse than its average of 8.5% growth between 2005 and 2010. All said, the BRICs will make up only 16% of worldwide growth in 2016.

Against all this, the rich world will look solid, if unspectacular. America’s economy will expand by around 2.5%, and the American jobs machine will crank out at least 2m new positions for a sixth straight year—the first time that has happened since the 1990s. Europe will no longer be threatened by recession or deflation, and the euro zone’s most obvious time-bomb, Greece, has been defused for now.

The world economy as a whole is forecast to grow by 2.7% in 2016, and it hasn’t managed an increase of more than 3% since 2011. Save for America, 2016 will be another year of repair, recovery, reform and risk for most countries.”

The “Heat Map”

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Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade equals B+ (very favorable). Gasoline prices continue to drop. Imports have become cheaper due to the strength of the U.S. dollar. Low interest rates will help real estate, an important component for the consumers’ wealth effect. These trends put more money in the pockets of Americans going into 2016.

THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.

The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.  The market consensus on the 2016 pace of increase is somewhere around two to possibly three rate increase of .25% each.

BUSINESS PROFITABILITY: This factor’s grade is a C (average). In about two weeks, investors will turn their attention to the fourth-quarter earnings season.

OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 7 which is an increase from 5 last week due to Saudi Arabia severing diplomatic ties with Iran. F These risks deserve our ongoing attention.

The Numbers

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Last week, U.S. Stocks and Foreign Stocks both decreased. Bonds were unchanged. During the last 12 months, STOCKS outperformed BONDS.

Returns through 12-24-2015

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

0.0

.6

.6

1.4

3.2

4.5

US Stocks-Standard & Poor’s 500

-.8

1.4

1.4

15.1

12.6

7.3

Foreign Stocks- MS EAFE Developed Countries

-.2

-.8

-.8

5.0

3.6

3.0

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.