The second half of 2015 was one of the worst periods for investing in a very long time. Yes, it rivaled 2001, 2008, and 2011. And while we expected the long-awaited rate increase to bring about a solid run-up in the market, known historically as a Santa Claus Rally, it was short lived due to the troubles in China and the Mid-East.

This year has certainly started on the wrong foot! Primarily, China’s economic reality has sent the world economy into a tailspin. While the world expected China’s growth to be in the 5% range (down from 7%+), the reality is that it will be more like 2-3%. China is no longer an emerging market and the world will have to adjust to this government-masked reality. Moreover, we have started the year with a flat-to-possibly inverted yield curve in the bond market. Historically, this indicates a recessionary trend. We need to see long term yields rise vs. short term yields and this won’t happen until housing starts pick up, which will increase mortgage rates and create a healthier bond market.

How will we invest going forward?

Our primary focus will be to stay in blue chip companies with strong balance sheets (P/E ratios below 17, a growing dividend, and solid sideline cash). For mutual funds, only the managers with the best long-term track record will make the cut. Given the world economic situation, it will be very hard to beat inflation using bonds as interest rates rise or high risk companies worldwide with P/E ratios above the historic average of 17. We believe that the US and world markets will continue this very choppy trend through 2016. We also believe that several sectors, including housing/real estate (ex-REITs), health care, Bio-tech, utilities, and consumer staples should fare best over the near-term.

We will be looking for good entry points to low volatility (P/E ratio below 17) stocks as well as lower volatility total return positions. We started this process in late September and it has been working for us. While we hoped for a sustained Santa Claus Rally, we positioned ourselves well for when this did not occur.

From here, we believe 2016 will ultimately fare better than 2015, but single digit returns (above 1% range inflation) are what we expect. The good news is that the US Economy remains very strong, and we are in a non-incumbent election year. Historically, that bodes well for US equity markets. The problem still remains that the US economy can only be successful for so long without help from international markets as we need the world to buy our goods! We need and expect to see a depreciating dollar later in the year. That will help reduce the price of oil as well as the price of our goods worldwide. There will be volatility early, as we are witnessing, but we are working hard to invest into what we hope will be a more solid and smoother 2nd half of 2016. And perhaps we will have a very strong Santa Claus Rally this December!! Please write Santa today and ask for one. We would appreciate it!

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