7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast http://slidepdf.com/reader/full/lane-asset-management-2015-review-and-2016-fearless-forecast 1/20 Market Recap for All of 2015 The story for 2015 was largely written by the U.S. Federal Reserve as it wavered on increasing the Fed funds rate — and eventually did so in December. It seems to me that, as much as anything, the factors that influenced the Fed’s thinking and the expectations of investors as they interpreted Fed moves (or lack thereof), were the primary drivers for both equity and investment grade corpo- rate (IGC) bond performance in the U.S. Here are some of those factors: U.S. unemployment — The most watched unemployment rate fell from 5.7% in Januar y to 5% today, a level last seen in March 20 08. Surely, a positi ve moti- vation for the Fed to raise its policy rate, but not enough by itself as the growth in average hourly earnings barely kept pace with inflation. Non-farm payrolls — For the 12 monthly reports ending in November, non- farm payrolls increased an average of about 220,000/month, a small decrease from 2014, but a strong increase from 2012 and 2013. Another factor sup- porting a potential rate hike. Inflation — The Core PCE Index (excluding food and energy), is the Fed’s primary focus. An annualized increase of about 1.3% in 201 5 was well be- low the Fed’s target of 2% and, as such, provided little incentive to increase the policy rate. Global growth — Led by a decline in China, the UN estimates global growth in 2015 at 2.4%, a 0.4% reduction from an estimate of only 6 months ago. In the last 5 years, China’s GDP growth rate has fallen from nearly 12% to about 7%. I believe slow global growth was a primary factor that delayed the rate hike in 2015 and will continue to influence the Fed and markets in 2016. The net result for the S&P 500 was an increase of 1.23% while IGC bonds ac- tually slid 1.26%. Eurozone equities slid 1.64% while emerging markets, heavily in- fluenced by the fallen demand for oil and other commodities, fell 16.17%. Oil (using the ETF for oil, DBO) sank over 42% in 2015 after having fallen over 40% in 2014. Gold sank over 10%. One perspective would suggest that 2015 was a year of consolidation after having 3 very strong years. Another would suggest that we have entered a new normal re- flecting lower global growth for years to come. That’s my belief. My forecast for 2016 follows. 2015 Review and 2016 Fearless Forecast January 1, 2016 Lane Asset Management The charts on the following pages use mostly exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly nor do they reflect the total return that comes from reinvested dividends. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Pro- spectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.
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7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
The story for 2015 was largely written by the U.S. Federal Reserve as it wavered
on increasing the Fed funds rate — and eventually did so in December. It seems
to me that, as much as anything, the factors that influenced the Fed’s thinking
and the expectations of investors as they interpreted Fed moves (or lack
thereof), were the primary drivers for both equity and investment grade corpo-
rate (IGC) bond performance in the U.S. Here are some of those factors:
U.S. unemployment — The most watched unemployment rate fell from 5.7%
in January to 5% today, a level last seen in March 2008. Surely, a positive moti-
vation for the Fed to raise its policy rate, but not enough by itself as the
growth in average hourly earnings barely kept pace with inflation.
Non-farm payrolls — For the 12 monthly reports ending in November, non-
farm payrolls increased an average of about 220,000/month, a small decrease
from 2014, but a strong increase from 2012 and 2013. Another factor sup-
porting a potential rate hike.
Inflation — The Core PCE Index (excluding food and energy), is the Fed’s
primary focus. An annualized increase of about 1.3% in 2015 was well be-
low the Fed’s target of 2% and, as such, provided little incentive to increase
the policy rate.
Global growth — Led by a decline in China, the UN estimates global
growth in 2015 at 2.4%, a 0.4% reduction from an estimate of only 6
months ago. In the last 5 years, China’s GDP growth rate has fallen from
nearly 12% to about 7%. I believe slow global growth was a primary factor
that delayed the rate hike in 2015 and will continue to influence the Fed
and markets in 2016.
The net result for the S&P 500 was an increase of 1.23% while IGC bonds ac-
tually slid 1.26%. Eurozone equities slid
1.64% while emerging markets, heavily in-
fluenced by the fallen demand for oil and
other commodities, fell 16.17%. Oil (using
the ETF for oil, DBO) sank over 42% in
2015 after having fallen over 40% in 2014.
Gold sank over 10%.
One perspective would suggest that 2015
was a year of consolidation after having 3
very strong years. Another would suggest
that we have entered a new normal re-
flecting lower global growth for years to
come. That’s my belief.
My forecast for 2016 follows.
2015 Review and 2016 Fearless Forecast January 1, 2016
Lane Asset Management
The charts on the following pages use mostly exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly nor do they reflect the total return
that comes from reinvested dividends. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Pro-
spectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
Page 11Lane Asset Management
Total return for the S&P 500 has been basically stagnant since March 2015 and price now seems bound by a
5% horizontal channel between $200 and $210 with a second line of support at $185. The 60-day moving av-
erage trend has also flat lined as the MACD momentum indicator is also losing steam. All in all, I think U.S.
equities are trying to find their footing. As shown on page 6, market breadth has deteriorated such thatfewer than half the stocks in the S&P 500 index are above their 200-day moving average. Not shown, but just
over half are above their 150-day moving average. With both of these percentages declining while the value of the price index remains rela-
tively stable, this is a condition ripe for a change — either the broad market will be moving up sufficient to bring the percentages along with it,
or the index will succumb to the weight of its underperforming components. A breakout from the current 5% channel will give us a good indi-
cation of which outcome we can expect to see.
S&P 500 Total Return
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
guarantee of future results.
Page 12Lane Asset Management
Below is a 20-year weekly chart of the total return for the S&P 500 with a 60-week moving average trend
line and the momentum indicator MACD. A year ago, we were near the top of the uptrend channel with
flattening momentum. Since then, we find the trend line flattening while the momentum is weakening.
With this perspective, we should anticipate a higher likelihood of a correction similar to the one we had inthe Fall. Given other issues, like weakness in global growth and lack of market breadth, a more severe correction cannot be
ruled out. Investors should be prepared for this possibility with either a strategy to lower exposure early (with a plan to re-
enter) or a willingness to ride out a condition that could last for months or longer.
S&P 500 — The Longer Term View
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
Past performance is no guarantee of future results.
Page 13Lane Asset Management
Reflecting the concerns of most investors, this analysis chart has been prepared to assist in making a decision about
protecting against a major market sell-off such as occurred in 2000 and 2008. The chart shows the weekly value of
SPY (the ETF proxy for the S&P 500 index on a total return basis) for the last 3 years. The red line is a 50-week ex-
ponential moving average (50EMA) and the green line is a 25-week exponential moving average (25EMA). Whenthe weekly price has fallen below the 50EMA, the 25EMA has crossed below the 50EMA, and the slope of the 50EMA
has turned negative. these three critical criteria would be an important signal to me that it would be timely to reduce equity expo-
sure, perhaps significantly so depending on the current state of the economy and market valuation. This has happened only twice in the last 20 years,
though it has come close on 3 other occasions, including last Fall. While it’s true there can be false or short-lived signals, taking steps to protect assets at
the “wrong” moment is, I believe, a small price to pay, especially since we don’t know how “wrong” the moment is at the time it occurs.
We are now at a stage of indecision by the market. Both the 25EMA and the 50EMA trend lines are essentially flat while the momentum indicator
(MACD) is also leveling. Price remains above the trend lines for now, but is volatile and lacks conviction. While none of the critical criteria are violated at
the moment, the current pattern presents a warning that should not be overlooked.
Portfolio Protection
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. As of 11/30/14, VEU was allocated as follows:
approximately 19% Emerging Markets, 46% Europe, 28% Pacific and about 7% Canada. Past performance is no guarantee of future results.
Page 14Lane Asset Management
International equities, represented here by Vanguard’s all-world (ex US) ETF, VEU, was unable to break
through a previous high just below $51and has now fallen back to a range roughly between $43 and $45.
From a technical perspective, the outlook is turning negative as both the trend and momentum are
weakening. With a 17% weighting in emerging markets, VEU has been buffeted by the weakness in oil and
other commodities — a condition I expect to continue for 2016. But the problems for the broad index go beyond emerging
markets where, except for China and India, the GDP growth outlook for 2016 is below the projected global growth rate.
On the other hand, there are a few countries within the broad index worth a place in a diversified portfolio. Best among the lot as I see it today
would be India despite the weakness in the Bombay stock exchange during 2015. India is projected to have GDP growth in 2016 in excess of 7%,
well above the expected global growth rate. India is not without its structural problems that will take many years to resolve. That said, as a ma-
jor destination for foreign direct investment, the long term outlook is good. Other countries worth examining include Japan and Europe on a
dollar-hedged basis.
All-world (ex U.S.)
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
SPY and VEU are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the FTSE All-world (ex US) index, respectively. Their prospectuses can be
found online. Past performance is no guarantee of future results.
Page 15Lane Asset Management
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. One useful tool I’ve
found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and
within sectors, as well). The chart below shows the relative performance of the S&P 500 (SPY) to the Vanguard All-world (ex U.S.)
index fund (VEU).
In this chart, the relative strength of equities remains in an established up-channel although there has been considerable volatility. I expect the
trend going forward will continue to favor domestic equities.
Asset Allocation and Relative Performance
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of
future results.
Page 16Lane Asset Management
Investment grade corporate bonds, represented below by LQD, began the year strongly as the yield on
the 10-year Treasury slipped, but eventually were overtaken by the recovery of the 10-year yield as it be-
gan to respond to the increased likelihood of the Fed funds rate increase. At this stage, we have a virtu-
ally flat channel of performance with weakened trend in the last two months along with a loss of mo-
mentum.
One lesson I learned in 2015 after projecting a strong return for LQD at the same time as an increasing 10-year Treasury yield was that the cor-
relation between the two is strongly negative. LQD had a total return in 2015 of negative1.3%, nearly 5% less than its current yield of about
3.5%. With an expectation of a slowly rising 10-year Treasury yield, it would be completely consistent to expect a very small total return for
LQD, if not a negative return in 2016.
Income Investing
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
SPY and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the iBoxx Investment Grade Corporate Bond Index, respectively. Their
prospectuses can be found online. Past performance is no guarantee of future results.
Page 17Lane Asset Management
In this chart, we see the continuation of a pattern of outperformance of U.S. equities relative to an index of investment grade cor-
porate bonds following a period of reversal last Fall. This pattern reflects the weakness in bonds as interest rates begin to move up.
From a technical, perspective, the trend appears to be continuing and momentum seems to be increasing in favor of equities. That
said, given concerns about equity performance going forward, I would not be overweighting equities at this stage until we have a
more convincing outlook.
Asset Allocation and Relative Performance
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
PFF seeks to track the investment results of the S&P U.S. Preferred Stock Index (TM) which measures the performance of a select group of preferred stocks . LQD is an ETF designed to
match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.
Page 18Lane Asset Management
In this chart, we have the relative performance of the S&P U.S. Preferred Stock Index ETF (PFF) to invest-
ment grade corporate bonds showing relative strength of preferred stocks.
While investment grade corporate bonds have been inversely related to the 10-year Treasury yield, the same
has not been true to preferred stocks, especially those of financial institutions, or REITs. In fact, as shown be-
low, there is a generally positive correlation between the yield on the 10-year Treasury bond and the relative
performance of preferred stocks to investment grade corporate bonds, probably driven more by the search for yield more than
the change in the Treasury yield. With the expectation of a slowly rising 10-year Treasury yield, and the improving trend and momentum of the
relative performance with bonds, I believe preferred stocks offer an excellent alternative income-oriented investment.
Income Investing
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
This chart shows the relationship of the U.S. dollar (USD) to a basket of developed-economy currencies (the Euro (nearly
60% of the weighting), Yen, British Pound, Canadian Dollar, Swiss Franc and Swedish Krona). Against those currencies, the
USD gained strength in 2014 and 2015, and is now more than half way from the 35-year low established in 2008 to the last
high point reached in 2001-2002.
The strength of the dollar has major implications for U.S. and foreign exports, a headwind for the former and a tailwind for
the latter. While there are multiple factors that affect dollar strength, high on the list is the divergence of U.S. Fed policy (tightening, if slowly)
while policy from the other major central banks are all either standing pat or increasingly accommodative. My expectation is that the dollar
will continue to gain strength, but that the pace will moderate as it has done this year.
U.S. Dollar
7/21/2019 Lane Asset Management 2015 Review and 2016 Fearless Forecast
Reprints and quotations are encouraged with attribution.
and related exchanged-traded and closed-end funds are selected based on his opinion
as to their usefulness in providing the viewer a comprehensive summary of market
conditions for the featured period. Chart annotations aren’t predictive of any future
market action rather they only demonstrate the author’s opinion as to a range of pos-
sibilities going forward. All material presented herein is believed to be reliable but its
accuracy cannot be guaranteed. The information contained herein (including historical
prices or values) has been obtained from sources that Lane Asset Management (LAM)considers to be reliable; however, LAM makes no representation as to, or accepts any
responsibility or liability for, the accuracy or completeness of the information con-
tained herein or any decision made or action taken by you or any third party in reli-
ance upon the data. Some results are derived using historical estimations from available
data. Investment recommendations may change without notice and readers are urged
to check with tax advisors before making any investment decisions. Opinions ex-
pressed in these reports may change without prior notice. This memorandum is based
on information available to the public. No representation is made that it is accurate or
complete. This memorandum is not an offer to buy or sell or a solicitation of an offer
to buy or sell the securities mentioned. The investments discussed or recommended in
this report may be unsuitable for investors depending on their specific investment ob-
jectives and financial position. The price or value of the investments to which this re-
port relates, either directly or indirectly, may fall or rise against the interest of inves-
tors. All prices and yields contained in this report are subject to change without notice.
This information is intended for illustrative purposes only. PAST PERFORMANCE