Jan 14, 2016 11:07 AM
The Market performance for 2015 was uninspiring with the Dow Jones Industrial Average down -2.2% and the S&P 500 off -0.78%. The year was marked by a substantial August and September sell-off. Following that sell-off we had an October recovery that was equally substantial. Volatility has increased all over the world because of a slowdown in China. The big loser for the year was oil, it was down -31% and the Industrial Commodities Index was off -15% in 2015. The big gainer was the U.S. Dollar up 9.3%. The NASDAQ composite was up 5.7% because of Amazon, Alphabet (formerly Google) and Facebook that are all at lofty PE ratios.
The increasing U.S. Dollar has dampened export earnings and industrial companies have borne the brunt with lower prices. We do not expect another 9% plus increase in the dollar for 2016 and as a result some industrials are becoming more attractive. Healthcare, Technology and the Financial sectors hopefully all look to have positive returns along with some recovery in energy prices. We find high quality equities more attractive than investment grade bonds for 2016. Selectivity will be most important for good results.
Our Pacific Portfolios performed in line with the market indexes, with one major difference. The portfolios held an oversized position in cash and short term U.S. Treasuries of about 20% for a good part of the year. Our accounts took less risk to produce approximately the same return as the Dow Jones or S&P 500 index. We at Pacific Coast Investment Advisors are risk adverse investors and seek to receive the going rate of market return while at the same time taking less risk than the market. We have maintained extra cash reserves to await opportunities during part of the last year and into 2016.
The 10 year U.S. Treasury bond yield was almost unchanged for 2015 at 2.23%. Bonds overall held their prices for the year with the exception of “Junk Bonds” or “High Yield” bonds which declined -10% during the year. Junk bond issuers sold more junk bonds than any time in their history. We are always surprised to see new clients bring in old portfolios that have an abundance of junk bonds. The surprise is to see these low quality bonds in conservative investors’ portfolios to the degree that they are today. Bond quality is important, the low quality is reflected in junk bond prices which are declining and many will default in 2016 and 2017. We have avoided these bonds for just that reason; the risk to principal exceeds the income potential. For 2016 we expect another relatively unchanged return for bonds except for junk or high yield bonds. There is a global slowdown that is being offset by QE (quantitative easing). We expect this QE to continue. If oil and other commodities remain near these prices junk bonds will continue to suffer. Beware high yield!