If you’re familiar with the adage, “As goes January, so goes the year,” your radar may be up more than usual right now. Dubbed the January Barometer, the saying is based on market analyst Yale Hirsch’s research findings that were published in 1972. However, as the Wall Street Journal pointed out last week, that theory has been proven to be statistically insignificant – yet another reminder to avoid overreacting to daily events and headlines.
After all, last January appeared to be the beginning of something quite scary: the NASDAQ sank 8%, the Dow dropped 5%, Chinese stocks plummeted 16%, and oil bottomed out at $26 per barrel. One investor fittingly called the markets in January 2016 “schizophrenic” and many were certain it was foreshadowing that the year would end badly. Recession fears grew and even Mohammad El Erian, a well-respected money manager and market forecaster, told CNN Money, “We can no longer rely on the Fed,” and, “It’s time to put 30% of your money in cash.”
Instead, markets rose dramatically by the end of 2016 – even with Britain voting to exit the European Union and international stocks exceeding U.S. stocks by 5% at one point. The tables turned in November with investors feeling more confident about the new president and promises of tax cuts in addition to plenty of fiscal spending.
Ending on a High Note
A stronger dollar muted the run-up in international stocks. Therefore, U.S. stocks took the lead and triumphed again in 2016 for the 8th year in row – one of the longest streaks in U.S. large-cap stocks in Post-World War II history! Additionally, U.S. small-cap stocks led all categories, primarily due to the election bounce in early November. (The small-cap value fund we use in most of our portfolios was up more than 26% for the year, with 14% of that return coming the last two months of 2016.)
Even with this run-up, the U.S. was only the 17th best-performing country out the 46 countries in the MSCL ALL Country World Index. Brazil, with a whopping 66% increase, had the highest-performing stock market, which ironically, provides another example of the perils of trying to forecast and time markets. That’s because despite Brazil’s sizable stock-market returns, their economy appears to be in shambles. In fact, projections indicate that once the final tally comes in, Brazil’s GDP for 2016 will have declined more than 3%. As Bloomberg notes, “Few Brazilians will mourn the passing of 2016. The president was impeached, a vast corruption scandal dominated the headlines day after day, and a devastating recession – the worst on record – crushed the hopes of millions.”
How our Redwood Portfolio Performed
Diversification really helped the overall Redwood portfolio in 2016 due to our emphasis on small-caps, mid-caps, and especially value stocks in U.S. and international markets. In our opinion, by using this approach, the Redwood Total Equity portfolio had a very good year.
And despite the U.S. interest-rate increase, interest rates decreased globally. Therefore, in our opinion, the Redwood bond portfolio returns were strong as well . Foreign bonds (+7%), corporate bonds (+5%), and treasury inflation-protected securities (+4.7%) helped fuel this. Additionally, oil-related master-limited partnerships (+17%), emerging-market bonds (+11%), and high-yield bonds (15%) helped our alternatives portfolio.
So, here we are in January 2017. Global equities are up 2% and the new administration is promising tax cuts, less regulation and more fiscal spending. In 2016, we were overly pessimistic and then saw counterintuitive results. Now, in January 2017, be careful not to be overly optimistic. There is little academic research showing that less regulation, lower taxes, and more fiscal spending translates into higher stock-market returns. Confidence is an important factor, but in the end, such excitement is just noise. (Sound familiar?)
As always, focus on a diversified portfolio and the right allocation for your stage in life. And don’t take bets based on chatter in the news. History tells us that could be a mistake.