BAM Quarterly Letter – Winter 2017

Dear Clients and Friends:

In 2016, the U.S. equity market reached new highs and stocks in most developed and emerging market countries delivered positive returns. The year began with anxiety over China’s stock market and economy, falling oil prices, a potential U.S. recession, negative interest rates in Japan, and the U.S. equity markets in steep decline (the worst start of any year on record). As the year unfolded, the equity markets improved mid-February through late June when the Brexit vote rocked investors causing a short, steep, stock market decline.  The markets recovered quickly from Brexit and then, starting in late September, began a slow and steady descent that lasted until the November 8th U.S. presidential election.  After the presidential election, the markets improved significantly.

Despite the rocky start, the U.S. stock market had a strong year. The S&P 500 Index logged an 11.96% total return and small cap stocks, as measured by the Russell 2000 Index, returned 21.31%.   Overall, performance among non-U.S. markets was also positive: The MSCI World ex USA Index, which reflects non-U.S. developed markets, logged a 2.75% return and the MSCI Emerging Markets Index an 11.19% return.

Both U.S. and non-U.S. fixed income markets posted positive returns. The Bloomberg Barclays U.S. Aggregate Bond Index gained 2.65%. The Bloomberg Barclays Global Aggregate Bond Index (hedged to USD) gained 3.95%.  Corporate bonds were the best performing sector, returning 6.11% in the U.S. and 6.22% globally, as reflected in the Bloomberg Barclays Global Aggregate Bond Index (hedged to USD).

While interest rates increased in the U.S., they generally decreased globally. Major markets such as Japan, Germany, and the United Kingdom all experienced decreases in interest rates. In fact, yields on Japanese and German government bonds with maturities as long as eight years finished the year in negative territory.

Many investors may not have expected global stocks and bonds to deliver positive returns in such a tumultuous year. This turnaround story highlights the importance of diversifying across asset groups and regional markets, as well as staying disciplined despite uncertainty. Although not all asset classes had positive returns, a globally diversified portfolio logged attractive returns in 2016.

Global markets are incredible information-processing machines that incorporate news and expectations into fluctuating prices. Investors are well served by staying the course with an asset allocation that reflects their needs, risk preferences, and objectives. This can help investors weather uncertainty in all its forms.

2017 will surely deliver new and unexpected uncertainties, which will cause markets to stumble and investors heartburn.  As these future unforeseen events unfold, we should read the news accounts with interest so that we are well informed. However, like 2016 and prior volatile years, we should exercise restraint from making changes to our investment allocations and stick with our well thought out allocations.  Despite future unforeseen events, which will undoubtedly cause volatility, diversified portfolios are highly likely to generate positive returns over the long run.

As we move into 2017, we wish you all 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

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