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Investment Letter

4th Quarter 2016

Another year has come to a close and tradition dictates that we reflect on the newsworthy events from 2016.  Here follows a brief recap: The U.S. and European nations lifted sanctions on Iran as a landmark nuclear deal took effect; the U.S. President visited Cuba for the first time in 88 years; the escalation of terrorism continued around the globe (Middle East, Brussels, Orlando, Nice, and Berlin); the world celebrated a successful Summer Olympics in Brazil; Pope Francis canonized Mother Teresa; Hurricane Matthew severely impacted Haiti, the Bahamas, and the eastern seaboard; the Chicago Cubs broke a 108 year World Series championship drought; Donald J. Trump won the U.S. Presidential election; and the United Nations unanimously voted to stiffen economic sanctions on North Korea in response to defiant nuclear tests.

The financial news in 2016 was just as interesting.  Stocks started the year by plunging approximately 10% and oil prices fell almost 30% before recovering; the unemployment rate in the U.S. fell below 5% for the first time since 2008; the Federal Reserve decided to delay forecasted rate increases due to economic uncertainty; Wells Fargo was involved in a widespread account fraud scandal; the United Kingdom voted to leave the European Union (BREXIT); OPEC agreed to cut oil production for the first time in 8 years; and the post-election stock market rally brought record closing highs for the Dow Jones Industrial Average (DJIA) and S&P 500 Index.

The financial record books will list 2016 as a successful year for equity returns, but that outcome was not certain early on.  The table below illustrates the movement of the DJIA, S&P 500 Index (domestic large company stocks), and the Russell 2000 Index (domestic small company stocks) during 2016.



S&P 500






2016 Low




2016 High












Investors were thankful for the 2016 strong finish by domestic stocks and optimistic that 2017 will be another profitable year.

The table below recaps the 4thQuarter and year-to-date performance of other major indices:

Asset Class


4thQtr. 2016 Total Return

2016 Total Return


BofA/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

While the DJIA flirted with breaking the psychological milestone of 20,000, economic data during the quarter signaled a continuation of the domestic expansion.

According to the U.S. Department of Commerce, the third quarter 2016 revised estimate for Gross Domestic Product (GDP) increased at an annual rate of 3.5%.  The increase in GDP reflected improvement in private inventory investment, acceleration in exports, an increase in federal government spending, and positive contributions from personal consumption expenditures.[1]

Here are some additional economic points for the 4thQuarter:

  • Consumer spending (the largest component of GDP) continued to be strong.
  • Consumer confidence improved as expectations reached a 13-year high.
  • Manufacturing activity expanded in December.
  • Corporate profits improved further.
  • Job growth increased by 156,000 in December.
  • The unemployment rate remained low at 4.7%.
  • Inflation increased to 1.7%.
  • Oil prices increased slightly to close the year at $53.75/barrel (West Texas Intermediate).
  • Housing starts declined but overall activity remained supportive.

Minutes from the Federal Open Market Committee’s (FOMC) December meeting confirmed the economy ended the year on solid footing.  The statement disclosed that real GDP was expanding at a moderate pace, labor market conditions had strengthened, real personal consumption expenditures appeared to be rising, and the pace of inflation had increased but is still below the Committee’s longer-run objective of 2%.  Based on stronger economic conditions, the Federal Reserve decided to raise the target range for the federal funds rate by 25 basis points to a range of 0.50% to 0.75%.  The Fed indicated their stance on monetary policy will remain accommodative to support further strengthening in labor market conditions and a return to longer-run inflation objectives.  Going forward, the FOMC expects economic conditions to evolve in a manner that warrant gradual increases to the federal funds rate.[2]

Overall, economic conditions overseas looked better during the second half of 2016.  While growth remained low, fundamentals in Europe improved.  The full impact of the BREXIT decision is uncertain, but improving labor markets, low inflation, easy monetary policy, recovery in energy prices, and a weaker euro should continue to boost economic momentum.

Latest estimates show that China’s growth remained steady at 6.7%.  Fiscal and monetary stimulus played an important role in helping officials maintain steady growth while rebalancing the economy from an infrastructure and trade-fueled economy to one driven by domestic consumption.  However, these policies are not sustainable long-term and eventually should be phased out.  Fears of a real estate bubble, decline in private business investment, and increasing corporate debt levels continue to be significant economic headwinds for growth prospects. 

Economic growth in Japan spiked up recently, but officials are attributing the good news to higher export demand from a more robust American economy and an ease in China’s slower growth.  Despite their ultra-loose monetary policy, consumer spending and business investment in Japan remain stagnant.

Activity in emerging markets remained mixed, and improvement continued to be country specific depending on external developments, global trade exposure, and commodity driven economies.

As we start 2017, our outlook for the domestic economy is slightly upbeat.  The aging expansion will soon enter its 8thyear, and we anticipate slightly higher economic growth during the next twelve months.  The labor market should continue to advance toward full employment, and we expect unemployment to remain low and job growth to continue.  Improvement in corporate profits, housing activity, and manufacturing should help sustain the positive momentum from 2016.  We do not expect the Fed to wait a year again to raise rates.  Higher inflation expectations and a stronger economy will force the Fed to pump the brakes at least a couple of times in 2017 to keep the economy in check.  OPEC’s willingness to cut oil production likely signals the end of relatively low oil prices.  Conditions around the world should continue to support a strong dollar, but President-elect Trump’s protectionist trade agenda might change currency dynamics.  The big change in Washington D.C. will be the Republican controlled government.  We believe the new president will have some success in promoting his policies, but we expect a watered down version as the final product.  Proposed increases to fiscal spending should be a positive for the economy, but a growing budget deficit is a problem the new administration will have to address.   

Our international economic outlook is brighter for 2017.  We expect economic growth in Europe to continue at a moderate pace.  Private consumption should remain the driving force behind growth as employment and wages improve across Europe.  BREXIT negotiations are ongoing and will heat up later this year.  The resulting new trade agreement between the United Kingdom and the European Union will have significant economic implications for the region.  China’s economic policy support will continue as officials look to promote and sustain growth.  However, the continued dependence on stimulus measures increases the risk of a disruptive and sharp decline in growth down the road.  We don’t expect Japan’s recent economic improvement to gain much traction.  They continue to be a weak link in the armor of the global economy, despite massive monetary and fiscal stimulus.  Stabilizing commodity prices should benefit many emerging market economies this year, but widespread political and economic reforms could be negative influences.  While we believe there are many opportunities abroad, investors need to recognize regional uncertainties and the increased potential for volatility. 

There are a handful of risks that we will be keeping a close eye on during the coming year.  New political agendas, fiscal and monetary policies, continued strength of the dollar relative to other currencies, oil prices, China’s growth, BREXIT negotiations, the Eurozone election cycle and escalating geopolitical tensions are just a few that come to mind.

Prudent investors avoid unnecessary risks and diminish those that can’t be avoided.  A diversified asset allocation strategy with exposure to multiple asset classes is a proven method to help mitigate the highs and lows of the financial market.  The table below represents the annual returns of various asset classes and of a diversified portfolio.[3]  In times when one asset class is dominate or has a long stretch of positive returns, it is easy to forget this important history lesson…Asset class winners are impossible to predict for any given year. 

Asset Class Annual Returns 1999 through 2016

 Diversifying an investment portfolio across multiple asset classes also makes an investor less dependent on the performance of any single asset class.  Look at the returns of the diversified portfolio in the table above.  It uses offensive assets (stocks), as well as, defensive assets (cash and bonds) to smooth out the volatile swings of individual asset classes.  In general terms, it is unlikely that a diversified portfolio will ever lead the pack, but conversely the opposite may also be true.  In any given year, it is unlikely that a diversified portfolio will ever be a worst performer.  Simply put, the information in the table helps to reinforce our belief that a diversified asset allocation strategy is a great method to manage portfolio risk while endeavoring to maximize portfolio returns.

As I have often stated, our investment philosophy remains based on the fundamentals.  We believe the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process.  We believe that it is time---not timing---that matters most.  The day-to-day price volatility of the stock market is unavoidable and can be deeply influenced by domestic and international variables.  Investors need to manage their expectations of the stock market accordingly.  In other words: Don’t use your emotions to make investment decisions; separate your money from your moods.

During the past year, I was pleased to be included in the following publications: 2016 Memphis Magazinelist of Five Star Wealth Managers, the 2016 Medical Economicslist: Best Financial Advisors for Doctors, and the 2016 Dental Practice Management/Dental Products Report:Best Financial Advisors for Dentists.

As our firm enters its 34thyear 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 2016 (Third Estimate), https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[2]Source: Federal Reserve System.  FOMC statement Press Release. 14 December 2016.https://www.federalreserve.gov/newsevents/press/monetary/20161214a.htm

[3]Data provided by Dimensional Fund Advisors.  Diversified Portfolio composition: Cash 10%, U.S. Bonds 30%, U.S. Large Co. Stocks 30%, U.S. Small Co. Stocks 10%, International Stocks 10%, and Real Estate Securities 10%.  Rebalanced quarterly.

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