Summary of our 1Q-16 Investment Strategy Meeting

We held our first quarter investment strategy meeting on December 22, 2015. From a longer-term perspective, we continue to believe the U.S. stock market remains in a secular bull market. That said, within secular bull markets there will inevitably be periods of volatility, corrections and cyclical bear markets. Our strategy of investing your capital in a diversified portfolio helps to mitigate exposure to market volatility.

While the stock market delivered  (up to now) a flat performance in 2015, we think a number of the issues contributing to that performance, such as the decline in oil prices, weaker nominal earnings, and uncertainty over Federal Reserve policy, are being resolved. The Federal Reserve finally raised its benchmark Fed funds rate on December 16. This action removes an element of uncertainty which overhung the market for many months. Also U.S. corporate profits declined in 2015 due to low oil prices, weaker exports, and the strong dollar. With the U.S. economy on firm footing (we expect real GDP growth of around 2.5% in 2016), and oil prices most likely in a bottoming process, this should contribute to improved corporate earnings visibility in 2016.
 

There are lingering issues in 2016, such as the strong dollar and slower growth in China and emerging markets, that will act as a drag on both global GDP and U.S. earnings; however, with the U.S. economy now delivering the strongest growth of developed world economies, we believe U.S. stocks will continue to be viewed as attractive. We also believe the pace of future rate increases by the Fed will be very gradual. This combined with moderate improvement in corporate earnings growth should help support stock valuations as we move through 2016. As we’ve said before, we believe stock market returns going forward will be lower than the mid-teens growth experienced over the past 5-6 years largely due to maturation of the economic cycle and slow global growth. We expect U.S. stock market returns going forward will more likely be in the 5-10% range.

With respect to significant changes in your portfolio following our meeting, we continued to increase our weighting in U.S. large and mid-cap growth stocks. We believe growth stocks that deliver higher earnings and cash flow growth will garner higher valuations in a slow or moderate growth environment. We also slightly reduced our exposure to international equities due to lower expected growth compared to the U.S. Within fixed income we slightly raised both long end and short end exposure. While we expect long rates to remain relatively flat even with the Fed gradually raising rates, long bonds provide a higher level of income in your portfolio. We expect short debt exposure can benefit more from a gradual rise in short-term rates thereby providing potential for growth in portfolio income.