Equities continue to churn out positive returns for the quarter and year to date in most categories including:

                                                             3rd Qtr                     YTD

Large Cap Growth                             4.6%                       6.0%

Large Cap Value                                 3.5%                     10.0%

Small Cap Growth                             9.2%                       7.5%

Small Cap Value                                 8.9%                     15.5%

Emerging Market                              9.0%                      16.0%

Developed Markets                          6.4%                       1.7%

Intermediate Bonds                        1.0%                        6.0%

US REITS                                             -1.2%                        9.5%

Source: Dimensional Funds

Value and emerging market stocks along with real estate have been the leading asset classes over the past year.  Most asset classes over the past year, however, have posted double digit gains except for Developed Markets (e.g. European/Japan/Australia).  These gains highlight the virtue of maintaining a diversified portfolio versus trying to anticipate the “asset class du jour.”  For most of the past decade, value and emerging market stocks underperformed compared to other asset classes.    Although relative political stability and the bottoming out of commodity prices helped emerging market stocks this past year, trying to time when and to what extent these stocks might have a turnaround is an impossible task.

Bonds continue to provide healthy returns (intermediate bonds YTD growth was 6.0%), as inflation remains largely in check and central banks continue to hold interest rates down.

The longer term outlook for equities is murky.  The US is already in its 87th month of expansion, which is pretty long as far as expansion goes (the post WWII average is 58 months).  The stock market has recovered well from fears earlier in the year of tanking oil prices and the implosion of China’s economies. While those issues have stabilized, new ones have emerged.  The US and world economies continue to lag behind their potential.  For 2016, the US will be lucky to achieve 2% GDP growth for the year, which is considerably subpar compared to other economic expansions.  European economic growth is even worse, however, with annualized growth forecasts in the 0.5% range.    Corporate earnings have also underperformed for the year.    Earnings growth has been negative for six straight quarters for companies in the S&P 500.  Earnings growth for the third quarter was -2.1%.   Ultra low interest rates have propelled stocks ever higher, as investors determine that there are few alternatives to invest their money despite weak underlying fundamentals.  With interest rates already at record lows and inflation slowly climbing, it is not likely that this factor by itself will continue to push stocks higher.

Having a consistent strategy of diversification and rebalancing is important in these times of uncertainty in order to take advantage of unexpected values in the market.   Although market volatility may taunt the typical investor, an eye on a longer term growth strategy will help position the savvy investor to benefit in the long run.  We are always happy to discuss and confirm for each of our clients an appropriate asset allocation which reflects your time horizon and risk tolerance.  If you have questions about the risk in your portfolio, please let us hear from you!

By Barry Jamieson, CFP®, MA

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