Equity investors entered 2016 with low expectations. Nine months later, markets are just shy of all-time highs. Year-to-date gains of 8% for the S&P 500, 4% for the MSCI All-World index, and 6% for the Barclays Aggregate Bond index have pushed us to these near record levels. After a greater than 10% correction to start the year, and the quick drop and pop from the Brexit vote, markets have steadily trended higher, including a historically calm two-month stretch in the summer without a 1% or greater daily swing. Income-focused investors, in particular, have experienced solid capital appreciation as fears over rate hikes gave way and the rush to buy stocks with relatively attractive yields went into another gear. Our dividend-focused clients have enjoyed this 2016 tailwind.
Yet, despite these gains, Wall Street and most investors are far from euphoric. Participation remains rather narrow with many companies still far from their highs. The market has been more interest-rate sensitive than earnings driven, and negative sentiment has kept investors defensively positioned. Love or hate this bull market, the question is “What to do from here?” On the following pages, we share our views, including highlighting some developments about which we worry and get excited. The worry side of the equation seems disproportionately weighted toward policy and leadership risks. The excitement side is rooted in frequent proof that individuals continue to innovate creating improvements to existing and exciting new companies in which to invest. Or, as President George Washington more eloquently put it “a people… who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.” Thus, we continue to believe a diversified portfolio with exposure to equities that will participate in the upside from these pursuits makes sense for long-term investors.