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Investment Letter

4th Quarter 2015


A review of the year’s news headlines illustrates the unpredictable nature of global events.  The major stories included: Domestic shootings, Presidential debates, global terrorist acts, Supreme Court ruling on same-sex marriages, geopolitical turmoil, Iran nuclear deal, immigration crisis, diplomatic relations restored with Cuba, struggling global economies, and the global agreement on climate change.  As we close the books on 2015, it definitely was an eventful year around the world.  We look forward to the promise of a new start and improved storylines for 2016. 

The domestic stock market rollercoaster ride had its share of highs and lows during the past year.  The Dow Jones Industrial Average (DJIA) had a rocky start to 2015, but climbed to an all-time closing high of 18,312.39 on May 19, 2015.  After that, the DJIA trended lower until mid-August when the wheels fell off and the index dropped to a low of 15,666.44 on August 25.  The mild correction was short lived, and by November the DJIA had recovered from the summer volatility.  Over the final two months, the index experienced minor fluctuations and finished the year slightly lower than where it started.  As of December 31, 2015 the DJIA closed at 17,425.03.  Activity in the S&P 500 index mirrored the DJIA for much of 2015.  The index experienced the same rocky start and then a gradual rise to an all-time high of 2,130.82 on May 21.  The index also endured a correction during the summer months to reach a low of 1,867.61 but recovered to close the year at 2,043.94.  The 2015 total return (including dividends) for the DJIA was +0.21% and the S&P 500 returned +1.38%.  Investors were dazed and confused after a frustrating year in the financial markets.

The table below recaps the 4th Quarter and 2015 performance of other major indices:

Asset Class


4th Qtr. 2015 Total Return

2015 Total Return


ML Three-Month U.S. Treasury



U.S. Bonds

Barclays Intermediate-Term Treasury



U.S. Large Co. Stocks

S&P 500



U.S. Small Co. Stocks

Russell 2000



International Stocks

MSCI EAFE (net div.)



Real Estate

DJ Select Real Estate Securities



                                   Source: Morningstar

The latest Gross Domestic Product (GDP) report released by the Bureau of Economic Analysis showed the final estimate for third quarter 2015 GDP increased at an annual rate of 2.0%.  The increase during the third quarter reflected positive contributions from personal consumption expenditures, nonresidential fixed investment, state and local government spending, residential fixed investment, and exports that were partly offset by a negative contribution from private inventory investment.[1]  Low growth rates sound alarming, but in the current economic environment this is the new normal.  In fact, 2005 was the last time the U.S. economy grew at an annual rate above 3.0%. 

Here are some of the major economic points for the 4th Quarter:

·         Inflation remained low.

·         Unemployment rate was unchanged at 5.0%.

·         Consumer spending (the largest component of GDP) continued to be strong.

·         Residential and commercial real estate activity generally improved.

·         Lending activity and credit conditions were better.

·         Commodity prices for crops and livestock remained low.

·   Manufacturing and corporate profits are being dragged down by the strong dollar and the poor performance of the energy sector.

The Federal Reserve finally decided to raise the federal funds rate in December by 0.25%.  The highly anticipated move by the Federal Open Market Committee (FOMC) is part of a strategy for policy normalization in response to the substantial progress in the labor market and anticipation of inflation moving toward 2.0% over the medium term.  The FOMC expects to raise rates gradually several times this year, but stressed that the potential to accelerate or slow the pace of policy normalization would be dependent on economic conditions.  The FOMC also decided to maintain its policy of reinvestment for principal payments from agency debt and maturing Treasury securities.  The Fed believes retaining this policy will help maintain accommodative financial conditions.

One of the big stories during 2015 was the low price of oil.  After showing signs of price stability during the year, the price of oil declined during the 4thQuarter to end the year at $37.13/barrel.[2]While lower oil prices have translated to savings for consumers, the desolation of oil prices is a concern over the long-term.  The root of the problem is a saturation of supply.  The shale oil boom increased U.S. production and OPEC has been unwilling to cut their production in an effort to protect market share.  Global consumption remained level during this time and the excess supply forced prices to plummet from over a $100/barrel in 2014 to the current level.  Falling prices equate to lower profits for oil producers and have even forced small producers to stop production.  In addition, lower profits mean fewer dollars available for infrastructure advancement and R&D (research and development).  These are crucial areas for future oil production.  Another concern is the lack of global demand given the supply level and price for oil.  Global demand for oil is one of the leading indicators for economic prosperity.  If demand does not increase when supply is plentiful and prices are cheap, it usually points to stagnant production of goods and services in other areas of the global economy.  Eventually prices should normalize as excess supply is used up, but pay attention to future demand for indications of additional stagnation or potential economic improvement.

We are cautiously optimistic about the domestic economy in 2016, and we are confident that most of the data still supports favorable conditions for investors.  Consumer spending will drive economic growth and lower commodity prices should help free up cash for consumers to spend. Government spending should increase due to the $1.1 trillion dollar spending and tax cut package passed by Congress.  This package also included the lifting of a forty-year ban on oil exports that will add to GDP over the years to come.  Unemployment and inflation should remain low, and we expect corporate profits to rebound this year after being dragged down in 2015 by the combination of the high dollar and declines in the energy sector.  Slower foreign growth and the high dollar will continue to be a headwind for activity in the U.S.  Therefore, we anticipate modest economic growth going forward. Now that the Fed has embarked on its policy normalization strategy, the worry and waiting for investors has diminished.  Reducing the uncertainty about the Fed and raising rates should help smooth out some of the volatility in the financial markets, but as any experienced investor knows, daily price movements are unpredictable. 

The prospect for improvement in international economies is not as bleak as last year.  China’s search for the right combination of stimulants to encourage economic growth will continue.  As we saw last year during the Chinese stock market debacle, the Chinese government will not hesitate in the future to control their financial markets or adjust fiscal policy to promote economic stability.  Emerging markets had a rough 2015 and will probably see more of the same in 2016 due to soft commodity prices.  Expect commodity dependent economies like Russia, South America, and the Middle East to struggle if prices remain low.  Overall conditions in the Eurozone are still lethargic but improving.  We believe growth will be more widespread and sustained in 2016 due to lower oil prices, the depreciation of the euro, and supportive economic policies.  Conditions in Japan should continue to improve with time, but their struggle to sustain and increase economic growth could require more government stimulus.

Investing in international markets can be an uncertain prospect for many investors especially during poor economic conditions.  However, we believe international investing is an important diversification strategy that should be a part of every prudent investment portfolio.  Here are the reasons why:

·         International stocks are becoming a larger part of the investment universe.

·         A large number of industry leading companies are foreign based.

·         International stocks provide exposure to faster growing economies.

·         International investments can potentially reduce overall portfolio volatility.

·         Investments in foreign markets provide greater diversification opportunities.

There are some added risks associated with international investing.  Economic and political instability of the foreign country, currency risks, market liquidity risks, and the cost of international investing are the main issues potential investors have to consider.  Over the long-term, adding international investments to a diversified portfolio of domestic stocks and bonds is a wise investment decision that can have substantial benefits.  International stocks have struggled lately, but economic conditions are improving and positive returns will follow.  Depressed asset prices offer great buying opportunities (buying at a discount).

As I have often stated, our investment philosophy remains based on the fundamentals.  We believe that it is time---not timing---that matters most.  That is why we believe the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return. 

During the past year, I was pleased to be included in the following publications: 2015 Memphis Magazinelist of Five Star Wealth Managers, the 2015 Medical Economicslist: Best Financial Advisors for Doctors, and the 2015 Dental Practice Management/Dental Products Report:Best Financial Advisors for Dentists.

Your financial health is important to us, so consider making a New Year’s resolution to revisit and update your financial plan.  Please feel free to contact our office to set up an appointment to discuss any changes to your financial situation. 

As our firm enters its 33rd year of providing advisory services, we want to wish you and your family a happy, healthy, and prosperous New Year.  Should you have any questions, or wish to receive William Howard & Co.’s SEC Registration Form ADV Part 2A and Part 2B Narrative Brochure, please let us know.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust.  Please contact me if you have any questions.

With kindest personal regards, I am

Very truly yours,



[1]Source: Bureau of Economic Analysis Gross Domestic Product: Third Quarter 2015 (Third Estimate), http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.

[2]Source: Federal Reserve Economic Data, Crude Oil Spot Price Report from 9/30/2015 through 12-31-2015,https://research.stlouisfed.org/fred2/data/DCOILWTICO.txt.



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