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Market Commentary 1st Quarter 2016

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Markets began the year with a swoon followed by a rapid recovery.  After falling as much as 10.5% in mid-February, the S&P 500 Index turned and actually ended the quarter up nearly 1%.  Across domestic and international stock markets, emerging market stocks performed best in the first quarter with a 5.7% return, reversing their last place finish within this group in 2015.  Inflation hedges also performed extremely well in the first quarter after poor results last year: gold was up about 16%, and gold miner shares were up more than 40%, while royalty trusts, master limited partnerships, managed futures, and commodity funds generally produced small positive results as well.  Bond markets were positive, and REITs were strong with a 5.8% return for the quarter.  Market indexes in balanced, diversified portfolios produced modestly positive returns that are a little less than we would expect in the long term, but our managed portfolios generally outperformed balanced benchmarks for the quarter by meaningful amounts.  

In the first quarter, the global economy grew at an anemic pace, and central banks stayed accommodative.  Broad diversification generally helped, and given elevated volatility, rebalancing was particularly helpful.  The domestic stock market’s drop in the first six weeks of the quarter represented only the second market correction in the past four years.  Our portfolios generally held up far better than their benchmarks in this sharp downturn, reinforcing our conviction that our broad diversification across asset classes and our emphasis on dividends, financial strength, and reasonable valuations for our stocks lead to a significant reduction in risk.  Furthermore, preserving capital in weak markets provides a big leg up when markets rebound, as they did in the last six weeks of the quarter.

With a turn up in market sentiment, and with our active management adding value, one may be tempted to signal “all clear” and declare the market’s troubles behind us.  We would love for that to be the case, but we remain cautious.  An unsettled political environment, weaker than desired economic growth, declining earnings, the Fed’s declared intent of raising interest rates, and most of all, elevated market valuations combine to leave us cautious and interested in broadening diversification.

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