ACE Wealth Partners annually sends out a mid-year letter to clients recapping the previous 6 months and providing expectations through the end of the year. While these letters are tailored to each client, this article provides a recap of the first half of 2016 and expectations for the next half.
2016: The First Half
At the beginning of the year, the equity markets came in like a lion with many entering bear market territory in the midst of one of the worst starts in history. This market decline was due to a slowing Chinese economy and the dropping price of oil. As I wrote in an article in ColoradoBiz Magazine on January 18, the news shaping the equity markets was not new. The media created fear which influenced the equity markets. In the long-run, the markets came back to equilibrium and continued with slow growth. The markets occasionally threw a fit with uncertainty regarding Janet Yellen’s approach to raising the Fed Funds Rate. As slow momentum increased, the markets encountered another hiccup with Brexit. The markets do not like uncertainty and Britain leaving the European Union creates uncertainty. The result is not crushing, but unpleasant for investors. After a steep two-day decline, equity markets have bounced back and leveled off.
With all of these headwinds, many asset classes still performed well year-to-date. Real estate, bonds, emerging market stocks, and commodities all performed at or above average historical returns. U.S. equities returns were slightly positive, but below historical averages while international developed stocks had single digit losses.
2016: A Look Ahead
At mid-year, we are left with a slowly growing U.S. economy and an overall struggling international economy with a mixed bag of data.
The domestic economy is at full employment with jobless claims recently coming in at less than 300,000 for the 59th straight week – a sign of a healthy job market. In theory, full employment should drive wage growth up taking care of the current weakness of lack of rising wages. The real estate market is red hot in Denver and strong across the United States. This should contribute to the wealth effect and ultimately increase GDP. Finally, oil has rebounded close to $50 per barrel which will provide some relief to the energy sector.
Unfortunately, there are headwinds in this current economic environment. The Fed continues to add uncertainty with the potential for rate hikes. Global growth is stagnant or slowing and Brexit is adding short-term uncertainty.
Overall, the U.S. economy ended the second quarter of 2016 on a downbeat note mainly due to a single international event – Brexit. As this situation unfolds and the resolution is known (remember, the markets hate uncertainty), the markets will go back to the fundamentals which show a steady U.S. economy and slow if not stagnant international economies. I expect portfolios to continue with solid positive returns, but historically lower than average overall returns. ACE Wealth Partners will continue to implement a “Core and Explore” asset management strategy using core asset classes with alternative investments to provide a truly diversified portfolio for clients.