BAM Quarterly Letter – Summer 2016
Dear Clients & Friends,
Turbulence in the markets continued during the second quarter 2016 as the Brexit vote rocked investor confidence. Concerns over the strong dollar, commodity price deflation, and weakness in the Chinese and European economies also continued to weigh on investors. In spite of the steep 5%-plus Brexit-related drop in the equity markets on June 24th and June 27th, and in the face of the other concerns listed above, the U.S. equity market (as measured by the Russel 3000 Index) increased by 2.63% during the second quarter. The U.S. bond market (as measured by the Barclays U.S. Aggregate Bond Index) also performed well during the quarter, gaining 2.21%.
The U.S. equity market advance appears to reflect several positive economic factors. Consumers are in relatively good shape, interest rates remain low, and oil prices are still low. So far in 2016, we have seen wages grow at about a 5% rate, the unemployment rate declined to 4.9%, nonfarm employment increased by over 1,000,000 jobs, consumer debt payments as a percentage of income hit at a 35-year low, and household net worth hit a historical high. According to a report published by J.P. Morgan Asset Management, consumers were responsible for generating 68.6% of GDP so far this year; therefore, the fact consumers are doing well is positive for the economy, corporate earnings, and the stock market.
That being said, there are a few negative factors that are slowing growth. Businesses are not investing heavily in new plants and equipment. This, in turn, will lower future productivity growth and reduce the rate of wage growth. The Dollar is high relative to other currencies so our exports will grow at a slower pace. And inventories are high so manufacturers may correct for this by slowing production and reducing employment growth.
So far this year positive economic factors have outweighed the negatives and the stock market has responded with gains. The gains have been hard fought as there has been significant volatility. This volatility, along with unexpected Brexit vote, unnerved many investors causing them to panic and sell after the market declined. Unfortunately, people who panic and sell at the wrong time tend to hold off on re-investing until the market has already recovered, thereby permanently locking in their losses. We are pleased to say we have educated our clients to be patient, long-term, investors who don’t panic during times of adversity; consequently, they have been rewarded so far in 2016 despite the market fluctuations.
As we noted in last quarter’s letter, the stock market appears to be anticipating an earnings recovery. S&P 500 earnings are expected to grow by about 11% in 2016 and the stock market appears to be responding positively as we move into the second half and projected earnings become real. Earnings growth is anticipated to accelerate as we move further into 2016 and early 2017 so, in theory, the stock market should follow suit.
To add caution to the discussion and not sound too optimistic, there are many factors that could derail anticipated short-term advances in the market. As we have said many times before, successful investors take a long-term view, refrain from trying to time the market, buy high quality diversified investments, and keep expenses low. These are the cornerstones of our investment strategy and we will continue along this path for the foreseeable future.
We hope your summer is off to a good start and wish you continued success and happiness. If you have any questions, please call.
Very truly yours,
Berkson Asset Management, Inc.
Registered Investment Advisor
Steven M. Berkson, CPA\PFS, CFP®, MBT