QUARTERLY INVESTMENT UPDATE
1ST QUARTER 2016
April 1, 2016
Dear Clients and Friends,
The first quarter of 2016 started out on the downside during the first few weeks of the year. However, U.S. stocks have just closed out the quarter with an upside reversal of historic proportions. Ever since the February 11 bottom, U.S. stocks have staged a dramatic rebound with the Dow Jones Industrial Average advancing 12.9%, which represents the biggest intra-quarter comeback since 1933. As long-term investors, we want to know whether this is the real thing or not. As always, we are more interested in what lies beyond the next bend in the road. Can the market continue to stride forward or was this massive rebound a fluke? Most of the problems that bedeviled the market during the first six weeks of 2016 remain with us. China’s economic growth continues to be more sluggish than at any point since the global financial crisis. Commodity producers, especially those with ties to the oil patch, are still bleeding red ink. The European Central Bank and the Bank of Japan are promoting negative interest rates in a desperate effort to shock their economies out of a multiyear coma. Nevertheless, a few bright spots have appeared on the horizon:
As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continue to maintain an average asset allocation mix of 45%-50% Equity, 45-50% Fixed Income and 0%-10% cash for most of the portfolios.
The quarter provided us very little opportunity to add any new position for both the Equity and Fixed Income portion of our portfolios. However, we did add one new position on the Equity side of our portfolios, which is Vanguard Health Care ETF (VHT), an exchange traded fund. Healthcare ranks among the market’s more defensive sectors, since these businesses cater to one of the “bare necessities of life”. Between 2014 and 2024, according to the Federal Center for Medicare and Medicaid Services, healthcare spending will outpace Gross Domestic Product (GDP) (in real terms) by 1.1% a year, a built-in growth engine.
As far as Fixed-income is concerned, investors have taken a wild ride for the past three years. It was in May 2013 that then Federal Reserve Chairman Ben Bernanke first floated the idea of “tapering” the central bank’s massive bond-buying program. Furthermore, collapsing oil prices from mid-2014 onward evoked the specter of a credit crunch for second-tier corporate borrowers. This double whammy threatened to tip a plodding U.S. economy into an outright recession in 2016. Meanwhile the unsettled financial markets of the past few months will likely keep the Federal Reserve from aggressively raising interest rates until the economy has built up a stronger head of steam. With the energy sector recovering and the Federal Reserve in a “kinder, gentler” mood, the risk of a recession this year will be virtually extinguished, which would be welcome news for lower-grade debt of all stripes. Thus, we added to our existing positions the Vanguard high Yield Corporate (VWEHX) fund, which has a current yield of 5.6%, as a measure of safety.
On the sell side of our Equity portions, we sold our entire positions in Jardine Matheson Adr (JMHLY); Aqua America Inc. (WTR); Empire State Realty Trust (ESRT); and Lowes Corporation (L). In the Fixed-income area, we sold our entire positions in Care Capital Property (CCP); Nicor Inc. (GAS); The Southern Company (SO); Allete Inc. (ALE); Amer Electric Power Company Inc. (AEP); OGE Energy Corporation (OGE); Realty Income Corporation (O); and McDonalds Corporation (MCD).
We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please do not hesitate to contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news, and Market Commentary archives.
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