2016 Wrap

Welcome to 2017!

In this first of the year issue of our commentary, we will summarize public market outcomes for 2016, and share thoughts about what makes for an economically healthy world.  Our commentary on the 9^th will look at potential trends, with a new administration in Washington.

Credit to: PSDgraphics.com

Let’s take a look at the public markets for 2016, though with a couple of explanatory notes.  First, these numbers are approximate, as they were pulled a few days before the end of the year.  Second, we are using index ETFs as proxies for market segments and investment classes.  With those caveats in mind, here’s a summary of 2016.

Domestic large cap stocks, as measured by the S&P 500 (SPY), were up just over 11% for the year.  Domestic small cap stocks, as measured by the S&P 600 (VIOO), were up 24% for the year, with most of that coming after the election.  Long term bonds (BLV) were up 5.82%, and short term bonds (BSV) were up 1.11%.

Outside the U.S., international developed markets (EFA) were up 0.08%, essentially flat, and emerging markets (VWO) were up 11%.  Real estate (VNQ) was up 5.9%, Gold (GLD) was up 7.29%, and commodities, excluding oil, were up 13.85%.

Over the last three years, commodities, oil, gold, and both international developed and emerging markets securities have had negative returns.  Over the same three years, domestic large and small caps have been up 9% and 9.5%, respectively, while long term bonds have been up almost 7%.  Domestic small cap average annual return over the last three years is slightly below its long term average of 11%, while long term bonds are slightly above their long term average of about 5.5%.

A balanced portfolio for 2016, comprised of 4% cash, 32% short bonds, 19% long bonds, 31% domestic large cap, 5% domestic small cap, and 9% international developed, would have had a return, based on the indices, of 5.67% for the year.

So what’s the outlook for the next several years?  Business growth depends primarily on use and consumption of products by either consumers or other businesses, with consumers accounting for roughly 70% of overall demand.  Consumer demand for products and services is driven primarily by population and income growth.  Population growth is a function of immigration policy and family size, and income growth is a function of several things, including work and educational opportunity, as well as cultural, social, economic, and tax policy.

What does all that mean?  Create an environment which is friendly to capital and business formation, have a culture that encourages work, accomplishment, family growth and formation, and cultural integration, and you should have a growing economy.

Where do we stand with all this?  Let’s look just at population growth.  

credit to: becuo.com

The world’s population grew slowly until about 1920, when it reached 1.85 billion.  The rate of growth jumped at that point, with improvements in life quality, with the growth rate peaking in 1962 at 2.1% annually.  The world population has continued to grow, and currently stands at 8 billion, though the annual growth rate has declined since 1962, and currently stands at about 1%.  It is expected to go negative by the end of the century.

These trends aren’t a business positive.  Healthy societies and economies need growing families.  Developed countries around the world aren’t replacing their populations with new births.  And, in many parts of the world, societal and cultural trends and pressures suggest few or no children.

The driver of U.S. population growth is immigration, and the birth rate of immigrants, which tends to be materially higher than that of the native population.  In the U.S., most immigrants are of Latin origin.  The driver of population growth in Europe is also immigration, though most immigrants across Europe are from the Middle East and Northern Africa. 

Most of these immigrants to Europe are legitimately needy asylum seekers.  Unfortunately, there are a number of bad apples in these immigrant populations, just as there are in immigrant populations to the U.S.  The challenge Europe faces, and one which has been a problem stateside, is the unwillingness to name evil.

There are philosophical challenges with drawing lines between good and evil, and very few politicians are willing to sacrifice their position and power by drawing those lines.  Unless and until countries have leaders with the intestinal fortitude to make such distinctions, and do something to promote good and repress evil, there will continue to be chaos.

But, back to population growth.  The population of many countries in Europe is growing, and almost all of it is attributable to immigrants and their relatively large families.    

As noted earlier, population growth isn’t the only driver of business health.  Other factors, referenced above, also play a part.  However, it’s prudent of us, from an investment perspective, to be aware of where the people are, what the trends are, and where demand is, and is expected to be, in the coming decades.