Market Commentary December 2016

Looking back on 2016, this has been one heck-of-a year!

We started out the year with the S&P 500 dropping 10.5% before getting back to even at the end of March.  From there, that same index at its best was just under 7% positive.  It seems to us like every time progress was made, there was a news event that knocked it back to even, or nearly even (i.e., Brexit, Russia, Wells Fargo…).

By the time we got to November 1st, the Aggregate bond index was ahead of the S&P 500, the Russell Mid Cap Index, and the Russell 2000 (Small Cap) index (stockcharts.com data).  While all were positive for the year, none of them were over 5% YTD at that time.

Then came the election and an unexpected result (at least based on how the market and many sectors were trading).  Since then, stocks have been going up and bonds have been going down (see chart below).

YTD indexs blended chart

YTD Chart of the S&P 500, Russell Mid Cap, Russell 2000 (Small Cap) and the Aggregate Bond Index

There is no doubt that patience plays a big part of investment success.  And when the market spends prolonged periods going sideways, we see investors start to get restless and want to make moves outside their usual comfort zone.  That’s when a reminder like this is especially helpful:

“The Stock Market is a device for transferring money from the impatient to the patient.” – Warren Buffett

In the world of Sector Rotation, specifically since the election, it seems that the year-long fog has lifted and clear leadership has been somewhat re-established.  We believe that by having the uncertainty of the election behind us, we will have a better view of which parts of the market are expected to benefit.

The bond market, going forward, might have a different picture.  For quite some time now, we’ve been alert to the possibility of interest rates rising, which we would expect to cause bond prices to go down.  After over three decades of a positive run in the bond market, we might, just maybe, be due for a bear market in bonds.

Knowing this is possible, we keep cash/money market as an investment option in our strategies.  This gives us a lot of flexibility.  There can be periods when no investment is working.  During those times, we like having the option to “get out of harm’s way and wait until the storm blows over.”  For example, in several of our portfolio models, we have had half of the bonds portion invested in cash since the beginning of November.

In 1918, nearly 100 years ago, both the bond market and the stock market went down together.  And in many ways, we believe the 2000’s are replaying some of the cycles seen in the 1900’s.

Speaking of these cycles, on Thursday (Dec 8th), CNBC ran a story about the current over-valuation of the US Markets (haven’t we been saying this for over a year now?).  The story includes an interview with Robert Shiller, Economics Professor at Yale University.

Check it out here:  http://www.cnbc.com/2016/12/08/market-indicator-hits-levels-last-seen-before-plunges.html

In summary, this year has been quite the journey, but we sincerely thank you for coming along with us.  We realize patience is a difficult journey – but one that is ultimately rewarding.


Happy Holidays from all of us at Shadowridge!!


1 The Standard and Poor’s 500 is an unmanaged, capitalization weighted benchmark that tracks broad-based changes in the U.S. stock market.  This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors.  The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.

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