Market Summary

2015 was a difficult year for investors as many of the major asset classes finished down or flat for the year. The trends over the last few years continued in the fourth quarter, including U.S. stocks outperforming most other world markets, declining prices from oil and other commodities, a strengthening U.S. dollar and low returns from fixed income.

U.S. stocks, as measured by the S&P 500 Index, were one of the best performing asset classes and after a strong rally in the fourth quarter, finished the year slightly positive. With economic growth sluggish and the Fed raising rates for the first time since 2006, investors piled into the few companies that were growing. That translated to Growth, especially large-cap Growth, outperforming[1]. The energy and material sectors underperformed due to commodity prices falling nearly 25%[2]. This marked the fifth year in a row that commodities finished down. Outside of the U.S., the strength of the U.S. dollar hurt returns as emerging markets struggled and non-U.S. developed markets finished nearly unchanged. Unfortunately, there weren’t many places to hide in 2015, as bonds, measured by the Barclays U.S. Aggregate Bond Index, finished pretty much flat.

Through December 31, 2015. All returns are in U.S. dollars. Source: Morningstar

Stock Market Analysis

The trend for the overall stock market was basically neutral for 2015. Despite a positive gain for the S&P 500 Index, we saw a very narrow advance as only a few stocks helped the S&P achieve a gain. More stocks fell than rose in the year and the average stock in the S&P 500 fell 4%[3]. The S&P 500 reached its high for the year in May. It touched near those highs several more times throughout the year but never breakout to higher levels[4] (see chart below).

In August, we saw volatility rise, with the first 10% correction since 2011 occurring. Fortunately, stocks and bonds didn’t experience significant losses and went on to recover in the fourth quarter. The August correction marked the sixth pullback of 5% or more since 2010 and only the third correction of 10% or more[5].

U.S. stock valuations didn’t’ move much throughout the year. Valuations began the year at high levels and finished the year at high levels. We like to measure valuations based on a variety of indicators so that we aren’t relying upon one data point. Almost all of the measures we look at showed that valuations for the U.S. stock market were high. The chart below combines six different measures and combines them into a single reading that helps us figure out for where the market is relative to historical norms. The components include dividends, earnings, cash flow, sales, trend and inflation adjusted earnings. This combined valuation chart shows that the S&P 500 ended the year nearly 36% over its historical average[6]. The small chart in the upper left corner shows that when the market is overvalued by 20% or more future returns are lower than the average market return and also significantly lower than when the market is undervalued by 20% or more. Non-U.S. valuations remained lower and may have better return potential.

Economic Conditions

We saw much of the same from the economy in 2015 as we had seen the past several years. Gross Domestic Product grew at a 2.1% annualized rate, which was below the long term average but consistent with the current economic expansion[7].

In addition, we saw the unemployment rate continue to fall. It finished the year at a 5% unemployment rate, which was the lowest we’ve seen since 2007. In addition, housing construction continued to improve throughout the year and housing prices picked up as well. Finally, auto sales were the highest we’ve seen since 2000[8].

Financial conditions remained largely supportive of growth throughout the year. Interest rates and inflation remained near record lows although a stronger U.S. dollar hurt both the manufacturing sector and U.S. corporate profits. In December, the Federal Reserve raised interest rates for the first time since 2006, from 0% to .25%. While the rate hike was small, it raised fears that tighter financial conditions could stifle the economic recovery. In addition, interest rates moved substantially higher for lower rated corporations creating additional fears. The Fed indicated that they will raise rates at a much slower pace than past economic expansions. This should allow financial conditions to remain supportive for the foreseeable future. In addition, non-U.S. central banks such as Japan and Europe continued Quantitative Easing programs that should help support global growth.

A strong U.S. dollar made U.S. exports more expensive, dragging down U.S. GDP and hurting corporate profits. Many of the regional manufacturing indexes showed sustained weakness in the second half of the year. In addition, the ISM Manufacturing Index had a reading below 50 for the last two months in the year[9]. A level below 50 indicates contraction. It has been an important cyclical indicator and could indicate slower growth going forward. Corporate profits also took a hit as the U.S. dollar hurt revenue from oversees. Although the outlook remained positive, S&P 500 earnings per share dropped from an all time high in 2014[10].

If you’d like to discuss any of these topics and how they apply to your personal situation, please give our office a call.

IMPORTANT DISCLOSURES

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that Leonard Rickey Investment Advisors (“LRIA”, “we” or “us”) considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

This report is intended for informational purposes only and should not be construed as a solicitation or offer with respect to the purchase or sale of any security. Further, certain information set forth above is based solely upon one or more third-party sources. No assurance can be given as to the accuracy of such third-party information. Although LRIA strives to update all information on a timely basis, we disclaim any liability should the information or opinions change or subsequently become inaccurate. All information subject to change without notice.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

Stock investing may involve risk including loss of principal. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

INDEX DEFINITIONS

The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index of approximately 900 stocks and is designed to measure equity market performance in 21 developed market countries outside of North America.

The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand

[1] As measured by the Russell 1000 Growth Index

[2] Bloomberg Commodity Index

[3] James Investment Research

[4] Stock Charts

[5] JPMorgan Research

[6] Ned Davis Research

[7] JPMorgan Research

[8] Ned Davis Research

[9] Ned Davis Research

[10] JPMorgan Research