It’s Vu jà Dé All Over Again

Happy New Year’s Eve! The most natural thing to do this time of year is to reflect back on the past year, lay out some hopeful intentions for the coming year and generally ‘take stock’ of one’s life.

We lost a famous philosopher this year in September…Yogi Berra… whose malapropisms are seared into the American consciousness. Gems like:

• “If you get to a fork in the road, take it!”
• “A nickle ain’t worth a dime anymore.”
• “I usually take a 2 hour nap from 1 to 4.”
• “Baseball is 90% mental. The other half is physical.”
• “Slump? I ain’t in no slump…I just ain’t hitting.”
• “I really didn’t say everything I said.”

Perhaps the one that I like the best and the most appropriate to our discussion of the year’s current/past/future financial reality is this: “It’s Déjà vu all over again!”

Every year, we at Opus 111 Group sit down, review the past year, how our clients’ fared, what we feel we did well, what we could improve upon for next year—all in the hope that we can continue to add value to the lives of our clients and help them achieve their financial, retirement and estate planning goals. We are having that meeting on Monday, January 4th to lay out our thoughts for what we expect in 2016.

We also review the performance of the domestic and international equity and fixed-income markets, key commodities over the past year and also the prognostications of various market experts and pundits.

2015 Market Review (Data Sources: Investing.com & Yahoo.com)

S&P 500:

The index began the year at 2058 on January 2nd, 2015 and closed on 12/30/15 at 2063. Not exactly a banner year, but those two data points in isolation ignores the fact that there was a fluctuation in late August. On August 21, the index closed at 2102, but dropped 11% to 1867 just four days later on August 25. The highest level it reached for the year was 2134.

In 2008, this index began the year at 1411 on January 4th and began 2009 at 931 on January 2nd, 2009, registering a 34% in that year alone. It’s nadir was 800 on November 21st, 2008, which represented a 43% drop. And, since that time, the Index has appreciated 121% through the close of business on December 30, 2015.

Dow Jones Industrial Average:

Similar story for the Dow Jones Industrial Average. It began trading today on New Year’s Eve at 17,498, off 2.3% from where it started the year at 17,893. The low point was 15,370—a 12.2% drop.

In 2008, it began the year at 13,366 and ended the year at 9035, a 32% drop. Since then, it has appreciated 93%.

Oil Prices:

It’s hard to remember that in 2008, oil prices peaked at more than $147/barrel in July of 2008. Now it is $38, having reached it’s 10-year low of $36 just a few days ago. That’s a whopping 74% drop! In 2015, prices began in the $50s, almost reached $70.

In 2008, it began the year at $99/barrel, ran up to its $147 level, then dipped to $33/barrel and closed the year at $44.

10-Year Treasury Bonds:

In 2015, the 10-year Treasury Bond yield began the year at 2.20%, closed near 2.3%, peaking at 2.50% in mid-June.

Historically, the 10-Year Treasury bond yield peaked at 15.81% in September of 1981, and has been dropping steadily ever since to the current level—the lowest it has even been since 1962 according to the Federal Reserve Bank of St. Louis.

Perspectives on 2015 Markets

So, how do you feel? That’s the question which seems to drive most investors most of the time. As someone more famous than I is purported to have said: ‘everyone is entitled to their opinion, but not their facts.’ Keeping the facts in perspective is a very important service we provide to our clients. And overcoming the emotional pull of the moment, is an even more important thing we can help our clients with as well.

One thing that has become clear to me after 33 years in this business, is the consistency with which human beings (experts and investors alike) tend to forget how cyclical the markets (stock, bond, commodity, currency) are. It is completely understandable in the midst of what appears to be a dramatic fluctuation (for example, the dramatic drop in the price of oil in 2015 to its current level of $38/barrel from its 5-year peak in 2011 of $112/barrel) to think ‘this time it’s different’ and forget the fact that stock, bond and commodity markets regularly fluctuate.

While that may be a perfectly normal response to the inevitable cycles of the market news echo chamber, it isn’t a productive way to invest. Let’s remember some other overreactions in the past. Do you remember the ‘new economy’ assertions we experienced during the late 1990s with the dot.com boom? Back then, people were convinced that the ‘old economy’ stocks which had the temerity of having a ‘Price/Earnings’ ratio were done like dinner. So people threw money at stocks that were ‘hot’ and within two years, much of those investment dollars had vanished.

You’ve all probably read about the famous Dutch tulip and the South Seas bubbles several centuries ago. Same thing.

When the price of oil was soaring a few years ago I tried (with varying degrees of success) to convince some investors with large positions in diversified oil stocks that they should take profits because they were the largest stocks in the S&P 500. And now people think that oil will never climb above $40 again.

With interest rates where they are, it is hard for people to realize that we have been in a bull market since 1981…34 years as measured by the 10-Year Treasury bond. Don’t forget that bond prices and yields are inverse…so if yields are very low, bond prices are very high. And there’s a lot of risk in the bond market right now!

Summary

Perhaps in true Yogi fashion, we can learn about more about ourselves by reversing common philosophical wisdom of ‘Déjà vu (we’ve been here before). We need to recognize our tendency to believe the media pundits who always seem to suggest that the latest breaking economic news, or dramatic price decline in the stock, bond and commodity markets are monumental, unprecedented events. In other words, a modern-day Yogi might say Vu jàdé (we’ve never been here before).

When everyone around you is saying “we’ve never seen this before…”, “this time is different”, remember the best phrase the French ever uttered: “Plus ça change, plus là même chose.” (“The more things change, the more they remain the same.”)

What to do? Have a plan, make sure you are not following the herd, maintain a sense of discipline and most of all, keep things in perspective. The thoughts of some of the best investors in the history of the markets might be our best guidance. Consider the following gems:

• “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” (Warren Buffet)
• “I made my money by selling too soon….Nobody ever lost money taking a profit” (Bernard Baruch)
• “Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.” (Phil Fisher)

So as you consider the facts on the cusp of another year in the markets and review your portfolio’s performance, be sure to keep things in perspective.

And if you are a prospective client who doesn’t have a plan, or feels adrift in the squall of the economic news cycle, give us a call at (206) 283-2345, go to the Learn Center on our website at www.opus111group.com, follow us on Twitter @Opus111group and let us see what we can do to help you!

Have a healthy, safe, peaceful and prosperous New Year!

The Opus 111 Group Team!