Executive Summary

  • Year in Review – “Worst Start”, Brexit, Trump surprise victory
  • Small cap and Value stocks outperform
  • Interest rates decline mid-year, then rise to finish year higher
  • Will the US pass income tax and corporate tax reform in 2017?
  • Late innings for the current US economic expansion
  • The folly of forecasts 

In 2016, the US stock market reached new highs. You may recall that the market began the year with the “worst start” of any year on record. The “worst start” began early, with a 5% decline in the Dow Jones Industrial Average in the first four trading days in January. It continued in mid February, with US stocks down more than 11% for the year. By year-end the S&P 500 Index was up 11.96%. That’s a remarkable difference in market performance within the same calendar year. It makes the case for long-term thinking and following a disciplined approach to investing.

Last year was also a year marked by surprises. In June, voters in the United Kingdom voted to leave the economic agreement with the European Union. Prior to the voting results, almost every poll, and certainly the financial markets, expected a vote to remain in the EU. The reaction from financial markets to this surprise was initially strong. The Dow Jones Industrial Average lost 900 points in two days, and the British Pound declined below $1.30, a level not seen for over 30 years. However, within a week, global stock markets recovered their initial losses and even climbed higher. It was a remarkably fast reversal in market sentiment.

Markets reacted strongly to the surprise victory of Donald Trump in the US Presidential Election in November as well. This time, markets corrected even faster … literally overnight. On November 8, the day before the election, almost every poll predicted a win for Hillary Clinton. The New York Times gave Clinton an 85% chance of winning, and famed pollster Nate Silver of FiveThirtyEight predicted a 71.4% chance for a Clinton victory. To say that Trump’s win was unexpected is an understatement. What is more interesting, however, is the initial reaction and subsequent reversal in financial markets. As the election results became clear, Dow futures fell as much as 800 points. S&P 500 Index futures declined 5%, prompting a halt in trading. In Japan, the stock market was open overnight and closed down -5.4%. European markets initially traded down but finished the trading day higher than the open. US stocks initially opened lower on November 9, but recovered by mid-morning and closed in positive territory for the day. Stocks continued to rally through the end of the year.

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ThirtyNorth’s Fritz Gomila contributed to an article in this month’s edition of Biz New Orleans magazine. In “Resolving to be Financial Sound”, Fritz discusses the challenges retirees face in a low interest rate environment and offers advice for employees saving and investing in their retirement plans.

Here is an excerpt from the article:

“ThirtyNorth’s Gomila says trading on emotion can be costly. ‘Be cautious about changing long-term investment strategies based upon short-term headlines and events.’ Protecting your financial assets, he continues, is critical. ‘Make sure you understand the risk in your portfolio. The last thing you want is to take more risk than necessary to earn your returns.'”

To read the entire article on Biz New Orleans’ website click the link below:

Resolving to be Financially Sound

The Women Impact Strategy finished 2016 strong, outperforming the Russell 3000 Index by 1.88% net of fees since the strategy’s inception on April 7, 2016. As we look forward to our 1-year anniversary in the strategy, we are quite excited by this early performance.

The portfolio is comprised of fifty stocks, purchased at equal weight, and mirrors the sector weighting of the Russell 3000 Index. These companies have a minimum of 20% female board members and at least one woman in the executive suite. The portfolio average is 30.4% female board members and 26.0% female executives. Four of the companies are run by female CEOs and seven have a female Chairman of the Board.

In addition to screening for gender diversity, we look to buy companies we believe can outperform the market. We evaluate companies based on their size, value, and profitability. The Women Impact Strategy offers a potential first-movers advantage and is intended to provide the benefit of social impact with competitive returns.

View the 4th Quarter Fact Sheet for the Women Impact Strategy:


Despite a plethora of academic research on the benefits of gender diversity in groups, corporations are painfully slow in adding women to their boards. The main question for investors, however, is whether the presence of women on boards improves stock performance. In order to answer this question, we evaluated the companies in the S&P500 Index in 2006 and tracked their performance for 10 years.

We looked at the gender makeup of the boards of companies in the S&P500 Index and tracked their stock performance over a ten-year period. We then divided the stocks into portfolios with zero women, one or more women, and more than 25% women on their boards. The results are fascinating, although not necessarily surprising given the breadth academic research on the benefits of cognitive diversity in teams.

These results do not imply that one gender is superior to the other, but that the combination of both genders has the potential to unlock value in publicly traded stocks.

To read our whitepaper – Impact of Women in Corporate Leadership: The Relative Stock Performance of Gender Diverse Boards, click this link below:

Impact of Women in Corporate Leadership

The third quarter finished strong for most global stock and bond markets. U.S. stocks, measured by the S&P500 Index, were up 7.84% for the year. Markets have pulled back a bit since the end of the quarter, however. Most of the economic news in the U.S. was positive over the summer, and corporate earnings recovered from last year’s decline in energy profits. International developed stocks fared the worst, yet the MSCI EAFE Index ended the quarter in positive territory year to date up1.73%. This is despite a rate cut by the Bank of England and a lackluster GDP report from Japan. Emerging market stocks soared. The MSCI Emerging Markets Index was up 16.02% year to date at quarter end. Despite painfully low interest rates, even bonds posted healthy returns. The Barclays Aggregate Bond Index was up 5.80% year to date. Both real estate and commodities had strong returns. Global REITs were up 12.35%, the Bloomberg Commodity Index was up 8.87% through the end of the quarter.

No One is Talking About Emerging Marketspicture1

Quietly, emerging market stocks and bonds have outperformed US and International developed
countries by a wide margin this year. Yet, this is getting practically zero coverage in the media. For almost 6 years, emerging market stocks underperformed, and investors lost interest. Fair weather fans rarely have the opportunity to bask in their team’s glory. So far in 2016, emerging market investors who have stuck to their discipline, were handsomely rewarded. The MSCI Emerging Market Index is up 16.02% versus 7.84% for the S&P500 Index and 1.73% for the MSCI EAFE Index.

The table to the right illustrates the dispersion of stock returns across various emerging market countries. Strong performance is not limited to a particular geographic region. Countries in South America, Asia, Eastern Europe, and the Middle East all exhibited double digit returns.

The story is similar for emerging market bonds. The JPMorgan EMBI Global Index of dollar-denominated emerging market sovereign bonds is up 15.04% versus 5.80% for the Barclays US Aggregate Index and 6.68% for the Citigroup World Government Bond Index (hedged to the US Dollar).

While we knew that emerging markets were undervalued, we had no way to predict the timing of a turnaround. What’s most surprising is the lack of coverage by the financial media. We are happy to keep this secret to ourselves for now.

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Despite tumultuous headlines, global markets finished the second quarter of 2016 on a high note. In the weeks since quarter end, major US stock market indices have reached new all time highs. US stocks were up 3.84% through the first half of the year, measured by the S&P 500 Index. Emerging market stocks snapped a pesky losing streak, gaining 6.41% through June. International developed stocks suffered a setback with the UK’s Brexit vote in late June. The MSCI EAFE Index was down -4.42% year to date. Interest rates plunged to new lows after the Brexit vote and global bond prices soared. The Barclays US Aggregate Index was up 5.31% for the year. Both real estate and commodities fared well during the first half of 2016. Global REITS were up 12.33%, and the Bloomberg Commodity Index was up 13.25%.

Brexit, What Brexit?

On June 23rd, the U.K. voted to leave the European Union. The “leave” vote, titled Brexit, was unexpected, and markets reacted violently. The Dow Jones Industrial Average fell more than 600 points on Friday, June 24th.  The British Pound fell more than 7% overnight, to levels not seen since the mid 1980’s.  The Pound has not recovered its loss as many other financial markets have in the weeks since the Brexit vote.

One-Year Chart of British Pound to US Dollar

Pound Chart


After a sharp two-day drop, most global stock markets recovered quickly after Brexit. Bonds rallied as interest rates dropped to new lows, in anticipation of a rate cut in the U.K. and continued delay of a rate hike by the Fed. But the U.K. economy, European banks, and the U.K. property market continue to suffer.  Michael Hasenstab, global bond manager at Franklin Templeton, expects a 2% – 7% contraction in the U.K.’s economy over the next several years.(1)  That is a brutal economic disruption, as the U.K. must negotiate every trade agreement with the European Union, presumably on less favorable terms.  Hasenstab expects a modest hit to the remaining EU economy of 0.5% and minimal negative effects for the U.S. and emerging market economies.  Markets do not like surprises, and the Brexit vote was unexpected.  However, after the steep initial decline in global stocks, cooler heads prevailed, realizing that Brexit’s impacts outside the U.K. are likely to be minimal and won’t take effect for some time.

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Is the market not giving you what you want lately? Join the club. For the two years period ending in April, a 60/40 portfolio of world stocks and 5 year Treasuries is up a paltry 1.23%. That’s before costs and taxes. You’re portfolio is in the exact same place it was in early 2014. Sure, you’re long-term investor, but who has time to wait on a market like this?

When evaluating past returns of a 60/40 portfolio, it’s easy to view multi-year time periods as dots on a piece of paper. Sometimes we forget that, in the moment, 1, 2, or 5 years is a very long time. Investment managers like to look at 10 and 20-year time horizons for analysis. They often forget to consider the investor experience along the way. A child born at the beginning of the so-called “lost decade” was in the 4th grade before the S&P 500 return was positive in his lifetime. Think of all the milestones that happened between birth and 4th grade long division!

If the past two years has you down in the dumps, consider these other statistics about past market returns. Times like these are not uncommon. In fact, two years isn’t really that long of a time period for the market to be unforgiving. Let’s look at rolling six year periods of a 60/40 portfolio comprised of the S&P500 Index and the 5 Year Treasury bond.

Since 1926, there have been 1013 rolling six-year time periods. The average annual return over the past 90 years was 8.59%. Not bad for 60/40. During 38 of the 1013 rolling six-year periods, the 60/40 portfolio had negative returns. In 71 periods, or 7.01% of the time, returns were less than 2% per year. This is before investment expenses and taxes. In 98 time periods, 9.67% of the time, returns were below 3% per year. If low returns leave you wanting more, rest assured today is not outside the norm for past market behavior.

What about a globally diversified portfolio? After all, most investors today own a broader universe of stocks than the S&P 500 Index. The MSCI All Country World Index began tracking global stocks in 1988. There have been 269 six-year time periods since then. In 4 time periods, the 60/40 global portfolio had a negative return. In 43 time periods, 15.99% of the time, a global 60/40 portfolio returned less than 2% per year. By the way, the average return of the global portfolio was 7.33% per year.

Lackluster returns are not a new phenomenon. If markets were predictable, returns would be lower. Once you take the risk out the equation, you can’t expect to earn a high return. Even though investing is extremely frustrating at times, even for what seems a long time, remain in your seat. As a means of possibly reducing the likelihood of a down year, investors always have the option of forgoing stocks completely. That brings a portfolio’s expected return to the level provided by bonds and it likely means the investor has to save a much larger percentage of her earnings if she want to retire comfortably. However, as shown above, over six-year periods, remaining exposed to stocks generated respectable returns.

Mick Jagger and Keith Richards tried to tell us in 1969, that You Can’t Always Get What You Want, at least not exactly when you want it.


On April 6th, the U.S. Department of Labor (DOL) issued its final rule on the fiduciary standard for retirement accounts. The rule stipulates that brokers cannot give conflicted investment advice to consumers in 401k, IRA, or other qualified retirement plans. There is an exception that allows brokers to enter a Best Interests Contract agreement with customers to allow flexibility of services and products provided. This agreement stipulates that the broker will provide advice that is in the Best Interests of the client and opens the broker up to litigation, including class-action litigation, if the contract is not honored. Prior to the Best Interests Contract, brokers were able to force customers into arbitration agreements, keeping disputes out of the courts.

You might be asking yourself – Don’t brokers already have to look out for the best interests of their clients? The short answer, is no. The financial service community is broken into two (or three) types of regulatory regimes. Brokers, or registered representatives, operate under FINRA’s Suitability Rule. Brokers work for large and small broker dealer firms such as Bank of America’s Merrill Lynch, Morgan Stanley, Wells Fargo, and LPL Financial to name a few. Financial advisers, employed by Registered Investment Advisory firms, are held to a fiduciary standard. Insurance agents adhere to yet another set of rules, but many are also registered representatives who follow the suitability rule. The suitability rule is a lower bar than the fiduciary standard, allowing brokers to put their firm’s interest ahead of clients in many cases.

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If I simply told you that US Large Cap stocks were up 1.35% and bonds were up 3.03% in the first quarter of 2016, I’d be leaving out a large part of the story. In between January 1 and March 31, stocks declined as much as 10% in early February, only to reclaim the entire loss and post a small positive return by quarter end. That’s a rocky ride, even compared to historical market moves. International developed stocks fared worse, the MSCI EAFE Index was down -3.01% for the quarter. Emerging market stocks finally shined, with the index up 5.71%. Commodities posted a slight positive return, up 0.42%. Global REITS had strong performance, up 7.22% in the first quarter of the year.

While Americans watched our new favorite reality show “The 2016 Presidential Election,” there were several fascinating and important stories developing for investors around the world.

Negative Interest Rates in Japan

On January 29, the Bank of Japan (BOJ) announced a negative interest rate policy. The Japanese equivalent of the Fed Funds rate is now -0.1%.[1] This negative policy rate is effectively a penalty on banks that do not lend aggressively since banks have to pay interest on excess reserves. The BOJ is now the second major central bank to adopt a negative interest rate policy. The European Central Bank (ECB) has been negative since mid 2014. Other countries with negative policy rates include Switzerland, Sweden and Denmark.

The BOJ’s announcement was a shock to market participants, sending Japanese stocks higher and the Yen lower against the US Dollar. Previously, Bank Governor Haruhiko Kuroda stated that Japan would not adopt negative interest rates. Currently 60% of global government bonds are paying less than 1%, with almost 30% paying less than zero. [2] It remains to be seen whether these extreme and unconventional central bank policies will have a positive or negative effect on their home economies.

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Index averages hid much of the investor experience in 2015. The S&P 500 Index finished the year up 1.38%, but it was led by strong performance in a handful of stocks. The index level of the S&P 500 was actually below where it started the year, and dividends accounted for the positive total return. International stocks were down -0.81% in 2015, dragged down by the strength of the US dollar. Emerging market stocks suffered in 2015. The MSCI Emerging Market Index was off -14.92%. Historically low interest rates did not help bond returns. The Barclays US Aggregate Index was up 0.55% for the year. Commodities continued to suffer with a further drop in oil. The Barclays Commodity index was down -24.66%. Global real estate posted a slight positive return. The S&P Global REIT index was up 0.59%.

Much of the investor experience masked by these averages is attributable to stellar performance from what the media calls the FANG stocks; Facebook, Amazon Netflix, and Google (now known as Alphabet). Here are the 2015 returns for these four high-flying, growth stocks:

  • Facebook: 34.15%
  • Amazon: 117.71%
  • Netflix: 134.39%
  • Google: 44.16%

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