Philip Springer’s
Retirement Wealth Report
January 2016
Dear Client and Friend,
Last year wasn't a good one for the financial markets. But it wasn't terrible either, particularly
considering numerous challenges, such as weak corporate earnings, tumbling commodities prices, slow
global growth and increased geopolitical problems. A year ago, I told you that the biggest surprises of
2014 would continue as major trends in 2015. That's what happened.
One such theme was the superior performance of high-quality U.S. stocks, as shown by the
Standard & Poor's 500. The S&P 500's anemic total return of 1.4% nevertheless again was a leader among
world major equity indices. Yet the S&P 500 was much weaker than it seemed. While a handful of big
growth stocks jumped, the average S&P 500 stock was down 4%, and 30% fell 20% or more.
Here's how other major equity categories fared in 2015, based on returns of leading exchangetraded funds for U.S. investors: U.S. mid-size company stocks, -2.5%; U.S. small-company stocks, -4.5%;
world stocks outside the U.S., -5.8%; developed markets outside the U.S., -1%; and emerging markets
stocks, -15.8%. Note: The strong U.S. dollar reduced returns from non-U.S. investments.
Theme repeater #2 was the ongoing collapse in oil and other commodities, now 18 months old.
U.S. oil prices hit an 11-year low of $36 per barrel in late December. The basic causes of the steep
declines have been soaring production of oil and other commodities, combined with slowing demand
from China and elsewhere in a sluggish global economy.
Continuing theme #3 in 2015 was a mostly flat bond market. The yield on the benchmark 10-year
U.S. Treasury issue ended the year roughly where it started, at 2.27% amid low inflation and subdued
economic growth. But the yield moved in a wide range of 1.65%-2.5% because of uncertainty over when
(or even if) the Federal Reserve would raise its benchmark short-term interest rate from zero-0.25%. The
hike to a new target range of 0.25%-0.5% eventually came in mid-December.
Most other domestic bond categories also traded in narrow ranges. Municipal bonds led, at 2%3%. But high-yield corporate bonds dropped 8%-10% because of concerns about companies with heavy
debt loads, particularly in energy and other economically sensitive industries.
Last year also was notable for the return of stock-market volatility, as measured by the number of
daily moves up or down of 1% or more. Volatility reached its highest level since 2011, which also ended
with flat returns. And in 2015, we had the first pullback of 10% or more since 2011.
What caused 2015's increased market swings? One factor was uncertainty over when the Fed
would finally start to boost short-term interest rates. Another was slowing global growth, particularly
because of China's weak economy, the world's second largest. Energy-price declines were another key
indicator. A fourth reason was the strong U.S. dollar, up 10%. This reduced overseas profits of large U.S.
multinational companies. Some 40% of sales for the S&P 500 companies come from outside the U.S.
Geopolitical turmoil, including terrorism and the migrant crisis, inevitably increased investor anxiety too.
Looking Ahead to 2016
Entering the new year, many pundits expect 2015's stock-market results to continue. Unlikely:
Consensus predictions rarely come to pass, and two consecutive flat years have never happened. The most
important trend of all is intact: a bull market for financial assets. It's one of the longest ever, now almost
seven years old. Yet bull markets end not from old age alone. As of now, the three essential conditions for
continuation of this bull market remain in place: no recession; low inflation and interest rates; and
reasonable equity valuations. Stocks are modestly more expensive than average, with the Standard &
Poor's 500 trading at 16.5 times expected 2016 operating profits. But that's hardly excessive considering
the few attractive investment alternatives to U.S. stocks.
This bull market always has come with many challenges, "yes, buts" and high investor anxiety.
Let's start with monetary policy. Last year's excessive preoccupation about a Fed rate hike unfortunately
will shift in 2016 to the quantity and timing of future rate increases. The Fed itself has a scenario of four
quarter-point increases in 2016. However, the Fed has been consistently overoptimistic and wrong for the
last six years in its projections of economic growth, inflation and interest rates.
The reality is that future rate increases aren't justified under current conditions. U.S. growth is still
at a subdued 2%-2.5% annual rate. Solid job growth in 2015 helped push the unemployment rate down to
5%. But that rate is distorted by the declining percentage of people with jobs or looking for them, now at
a 39-year low. Fewer people working, combined with low wage growth, dampen economic growth.
Andinflation remains far below the Fed's target rate of 2%. Inflation has declined for four years and now
is running at 1.3%. Higher U.S. rates would boost the dollar more, further dampening growth and
inflation while adding stress in the emerging markets, which carry big dollar-denominated debt. Growth
outside the U.S. remains sluggish, amid a slowdown in China, weak commodities and excessively low
inflation.
No wonder yields of the best-quality bonds remain so low, fueled by strong investor demand for
safe income. Predictions of higher longer-term interest rates, with lower bond prices, have proven wrong
for years. It's too soon to say 2016 will be different. That said, fixed-income risks outweigh the rewards.
We have been in a long bull market for bonds, with falling yields, that started back in 1981. Significantly
lower yields from today's depressed levels probably would require a global economic recession.
A rebound in energy prices would be welcome in terms of investor psychology and what it says
about global growth. Yet low prices are a net positive for most people, with an estimated $85 billion in
savings for U.S. consumers in 2015. Again, the timing of a turnaround is uncertain, given continued full
energy production, especially from the world's three biggest suppliers: the U.S., Saudi Arabia and Russia.
Another positive trend reversal would be improving financial markets in the rest of the world,
which overall have lagged the U.S. for six years. A good sign: Other developed markets (western Europe
and Japan) did better than the U.S. in their own currencies in 2015. A potential catalyst: While the Federal
Reserve is tightening monetary policy, the rest of the world's major central banks are still loosening. And
non-U.S. equities are cheaper than ours. But cheaper for a reason, given slower growth, greater political
unrest and other issues. Here too, it's unclear when non-U.S. stocks will take the lead again.
Back here at home, corporate earnings will play a key role this year. In 2015, they were down,
primarily because of the weak commodities sectors as well as the strong dollar. In 2016, profits are
expected to improve, partly because commodities currently seem unlikely to decline as much as they did
last year, and the dollar's advance is expected to slow.
Our Primary Investment Strategy
Entering 2016, the big picture remains similar to that of the last few years: sluggish global growth,
minimal inflation, still-easy monetary conditions and rock-bottom bond yields. This is a continuing strong
foundation for high-quality U.S. stocks that pay good dividends in a low-income investment environment.
Dividends are a significant driver of stocks' total return, historically accounting for about 40% of
it. Dividend stocks have outperformed nonpayers over the past 75 years. And companies that make solid
and increasing payouts tend to have high-quality characteristics, with shares that on average are less
volatile than nondividend issues. Dividend investing, like other strategies, moves in and out of fashion; in
2015, dividend stocks lagged growth stocks but did better than most others.
Shares of many financially strong US corporations carry yields higher than U.S. government
bonds, and the income will rise over time. Companies in the S&P 500 boosted their dividends 9% in
2015, with projections of another 5%-7% this year. Stocks of large companies with cash and minimal debt
should fare relatively well as somewhat tougher borrowing conditions hurt big borrowers. Regardless of
what happens, we will do what's necessary to control risk and protect your financial security.
Yours for a Rich Retirement,
Philip A. Springer
President
Philip Springer’s Retirement Wealth Report is published periodically by Retirement Wealth Management, Inc., 1251
Thistle Down, Keswick, VA 22947. Phone: 434.202.1358, 800.498.8959. E-mail: Retirementwealth@aol.com. Please contact
us for information on our personal, low-fee wealth-management services for your retirement goals.