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January 1, 2016

L a n e A s s e t M a n age m e n t
2015 Review and 2016 Fearless Forecast

Market Recap for All of 2015

from 2014, but a strong increase from 2012 and 2013. Another factor sup-

The story for 2015 was largely written by the U.S. Federal Reserve as it wavered

porting a potential rate hike.

on increasing the Fed funds rate and eventually did so in December. It seems

Inflation The Core PCE Index (excluding food and energy), is the Feds

to me that, as much as anything, the factors that influenced the Feds thinking

primary focus. An annualized increase of about 1.3% in 2015 was well be-

and the expectations of investors as they interpreted Fed moves (or lack

low the Feds target of 2% and, as such, provided little incentive to increase

thereof), were the primary drivers for both equity and investment grade corpo-

the policy rate.

rate (IGC) bond performance in the U.S. Here are some of those factors:

Global growth Led by a decline in China, the UN estimates global

U.S. unemployment The most watched unemployment rate fell from 5.7%

growth in 2015 at 2.4%, a 0.4% reduction from an estimate of only 6

in January to 5% today, a level last seen in March 2008. Surely, a positive moti-

months ago. In the last 5 years, Chinas GDP growth rate has fallen from

vation for the Fed to raise its policy rate, but not enough by itself as the

nearly 12% to about 7%. I believe slow global growth was a primary factor

growth in average hourly earnings barely kept pace with inflation.

that delayed the rate hike in 2015 and will continue to influence the Fed

Non-farm payrolls For the 12 monthly reports ending in November, non-

and markets in 2016.

farm payrolls increased an average of about 220,000/month, a small decrease

The net result for the S&P 500 was an increase of 1.23% while IGC bonds actually slid 1.26%. Eurozone equities slid
1.64% while emerging markets, heavily influenced 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 reflecting lower global growth for years to
come. Thats my belief.
My forecast for 2016 follows.

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. Prospectuses 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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L a n e A s s e t M a n age m e n t
2015 Review and 2016 Fearless Forecast
2015 PREDICTIONS HOW THEY FARED
Predictions in black; 2015 results in blue italics.

as Europes bellwether country.


VEU lived up to expectations by trailing the S&P 500 by about 6%. On the other
hand, as with the S&P 500, I overestimated its performance for 2015 as the index

U.S. Equities

ETF ended the year down about 4.8%. I also greatly overestimated the results for

As I believe the primary drivers of stock market returns in 2015 will be corpo-

China and India (Ill speak more about these later). On the other hand, commodity

rate earnings and modest, if any, movement on the federal funds rate, my ex-

producing regions lived up to expectations with a serious shortfall as energy and the

pectation for the S&P 500 for 2015 is for a total return of 8-10% (measured by

global slowdown took a major toll.

SPY) with risk to the downside on account of international considerations. On

Bonds and Other Income Securities:

a sector basis, I expect healthcare, technology, consumer discretionary and


small cap stocks to outperform. There may be a rebound in energy, but Im not
prepared to go there now.

The 10-year Treasury yield surprised everyone in 2014, especially after its rapid
increase in 2013. The yield currently rests at about 2% and I believe it will end
the year near 2.5%. Total return for 7-15 year U.S. government bond funds in

While I overestimated the total return for the S&P 500 in 2015 by quite a lot (the

2014 was a bit over 9% while investment grade corporate (IGC) bonds funds re-

actual return was about 1.2%), I was right that the risk was to the downside on ac-

turned a bit over 8%. For 2015, I expect total return for IGC bonds between 6%

count of international considerations (see below). As for the sector calls, healthcare,

and 8%, still better than current yield. I believe the best opportunities for in-

technology and consumer discretionary all out performed the S&P 500 by about

come investing will come from preferred stocks, REITs and established, long

6.2%, 5.5%, and 9.9%, respectively. On the other hand, small caps stocks underper-

term dividend paying common stocks.

formed with a decline of 4.5%. The rebound in energy never occurred as the energy
ETF dropped over 20%.

Despite the long anticipation for a Fed rate hike and the eventual move, the 10-year
Treasury yield increased only marginally during 2015 from about 2.17% to 2.27% re-

As expected, it looks like corporate earnings were a key driver of equity perform-

flecting, I believe, the downward pressure from international government bond yields.

ance in 2015 as earnings have become likely to turn out to be negative for the year

IGC bonds actually lost ground in 2015 with a decline in total return of nearly 1.3%.

for the broad index. However, if energy is excluded, earnings growth is looking to

A point that was driven home for me this year was the negative correlation between

exceed 5%, a much healthier outcome. I was also directionally correct on the Fed

the 10-year Treasury yield and the performance of IGC bonds (more on this later).

funds rate hike with the smallest possible hike at the latest possible moment.

As expected, both REITs and preferred stocks both outperformed bonds, especially

International Equities

preferreds of financial organizations. On the other hand, dividend paying common

My estimate for total return from international equities, as measured by the

stocks disappointed by underperforming the S&P 500.

Vanguard All-world (ex U.S.) fund,VEU, is 2-3% less than SPY which, given the
above estimate, is 5-8% for VEU. I believe the international equity returns will
be very region specific with India and China leading the way and commodityproducing regions lagging. Europe is a wild card as the broader economy
struggles while the ECB may come to the rescue. Id keep an eye on Germany

** *** **
Every year is a learning experience and 2015 was no different. Three key messages from this past year were the importance of central bank policy here and
abroad, the lingering effects of the Great Recession, and the impact of China on
global growth.

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast


Investment Forecast for 2016

tor, they may be as high as 5% not stellar, but consistent with my starting

I begin each year mindful of what Bob McTeer, the

point for 2016. A broader look at corporate profits is provided by the Bureau
of Economic Analysis (BEA). Close examination shows theres been virtually

former head of the Dallas Fed once said, The first

no growth in corporate profits since 2011. While the forecast for 2016 is

rule of forecasting should be dont do it. Nothing good

brighter than the outcome for 2015 owing to less negative impact from

comes from it. My rule is, if you have to do it, do it

energy the energy sector will continue to weigh down aggregate results.

often. So what you read here is best taken with a

Headwinds will come from a strong dollar that will depress income and prof-

grain of salt and an understanding that the forecast

its from overseas and dampen exports.

may change as events unfold.


Domestic Equities
Last year, by relying on 2014s strong returns, I was overly optimistic about equity growth in the U.S. and abroad as I discounted the developing weakness in
global growth that had been telegraphed in a report by the IMF in October
2014. I also misread the Feds patience, appreciating the delay, but not giving
enough thought, in retrospect, to the underlying causes of that delay. Lets see
if we can read the tea leaves a little better this year.
For 2016, Ill be using the following criteria to form my year-end estimate for
the S&P 500:

Long term performance While the 20 and 35-year total return for the
S&P 500 has hovered around 10%, the total return for the last 8 years has
been about 6.3%, including the weak return for 2015. With expectations for

Monetary Policy The U.S. Federal Reserve finally took an initial step in rais-

U.S. and global GDP growth in 2016 to be about half the long term rate of

ing the Fed funds rate in December with a promise to be slow and measured

growth (2.4% vs. 4.6%) and a very high correlation between long term GDP

when it comes to future increases. In effect, the policy rate is expected to re-

growth and the S&P total return, something on the order of 5% may be a

main highly accommodative throughout 2016. As for policy rate drivers:

better starting point for an estimate of the S&P 500 total return for 2016.

The inflation rate remains well below the Fed target of 2% (about 1.3% in the

Corporate earnings According to FactSet Research, taking the S&P 500 as

latest year-over-year reading) and there appears to be little evidence of pres-

a whole (that is, including energy), the forecast is for the 4th quarter of 2015

sure from wages or commodities, I dont see inflation as causing a Fed move

to mark the first time since 2009 that there were 3 consecutive quarters of

in the near future.

negative earnings and 4 consecutive quarters of revenue declines. While

Although the unemployment rate is now at 5.0%, its lowest rate since 2007,

earnings for the full year could turn out negative, excluding the energy sec-

the Fed has backed off its focus on the absolute value as a trigger to its tim-

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast


ing for the benchmark rate increase. One concerning issue is the labor
force participation rate, now at a level not seen since the late 70s.
In the November reading recently released, the average hourly wage increased by 0.2%, about the average since 2006 and an improvement that has
been largely eaten up by inflation. The absence of wage pressures will help
to maintain a slow path for Fed rate increases.

In terms of the expected Fed funds rate increase, my view is that an additional 50-75 basis points might be added in 2016, with risk to the downside
keeping in mind that 2016 is an election year. As expected last year, the Fed
prepared the market well for the eventual rate increase and suffered no
damage because of it. I expect a similar degree of communication this year.

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast

Industrial Production Despite the approximate 30% share of U.S. GDP attributable to manufacturing, there is a strong correlation between the U.S.
industrial production index (IPI) and the S&P 500, as shown on this next
chart. The observation to be made here is that both the IPI and the S&P
500 have been relatively flat since late 2014. Although I dont know for sure,
I suspect that the IPI has been flattened by the reduction in energy-related
construction brought about by the sharp decline in the price of oil. If we observe any additional deterioration in the IPI, that would not bode well for
the broad S&P 500 index.

with a lower outcome by year-end more likely. If Im right, this will be a tailwind for U.S. consumers but a headwind construction spending and emerging markets.

Oil And speaking of oil, its not at all clear to me where the price is headed
in the near-term. This next chart is for Brent, the global price benchmark
for Atlantic basin crude oil. Although the chart is hard to read, the point to
note is that its only in the last 10 years that oils per barrel price exceeded
$40. With low inflation, slowing global economic growth, Iranian oil likely
coming on-line, Saudi Arabia keeping supply levels high, and an end to U.S.
oil export prohibition, I am not expecting much in the way of price recovery

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast

Analyst estimates According to a survey of 10 prominent analysts by Barrons taken December 12th, the average expected increase for the S&P 500
index for 2016 amount to 6.8% taking dividends into account (Ive ignored
the 2+% gain that the index increased in December after the predictions
were made since Im assuming the predictions were made as if there was no
change in the remaining part of 2015 otherwise, while I could be wrong,
their predictions would call for a 4.8% return for 2016 which I doubt was the
intention).

Market breadth One measure of market strength is a growing or persistently high percentage of individual stocks that are above their 200-day
moving average (DMA). Over the last 10 years, there has been a positive
correlation between the performance of the S&P 500 and the number of
stocks within the index that are above their 200 DMA that is, until recently.
As the next chart shows, sudden reductions in the percent of stocks above
their 200 DMA have generally been followed by rapid recoveries as in the
period from 2004-2007 and 2009-2013. On the other hand, a more persistent reduction as in the period from 2007-2009 seemed to portend the
significant market correction which came about as the percentage continued to deteriorate. The interpretation here is that the market continued to
advance on the strength of fewer and fewer large cap stocks until a certain
reality took hold bringing the entire market down.
Bearing in mind that this is only one example in the last 16 years and that
there is absolutely no guarantee that past performance will be repeated,
this pattern seems to have begun again in 2014 (or a little earlier, depending
on your perspective) so far without a corresponding correction. But this
divergence cannot last. Eventually, either the percentage of stocks under
their 200 DMA needs to improve or the broader market needs to adapt to a
new reality. While I dont believe the market is primed for a major correction, it is something we need to watch carefully.

Recession Watch According to an early December article in Fortune, JPMorgan predicted a 76% chance of a recession in the next 3 years with a 25%
chance within the next 12 months. Citibank increased the ante by placing
the probability at 65% for 2016. And, if you do a Google search, you will find
JPMorgan and Citi are not alone in expressing concerns.
On the other hand, the New York Fed places the probability of a recession at
virtually zero using the highly respected yield curve as a predictor of recessions (see next page). Note in the bottom chart that the nominal (not inflation-adjusted) yield curve is no less steep than it was a year ago and the real
(inflation-adjusted) curve is actually a bit more steep, i.e., suggesting a recession is less likely.
Do I think a recession is likely? Id have to say no on the basis of the steady, if
slow, recovery underway since 2008. But, with a consensus for global growth
in 2016 around 2.4%, it wouldnt take much of a slippage to raise the potential for a recession. It is for this reason that it is important for investors to
remain alert and flexible, with a game plan in mind should events turn ugly.

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2015 Review and 2016 Fearless Forecast


While were on the subject of a market correction, heres another perspective: As this next chart shows, since around 1995, there has been a fairly consistent and significantly high negative correlation between the U.S. unemployment rate and the performance of the S&P 500. While the economic
conditions resulting in a major correction are never exactly the same, if this
pattern was to continue, it would appear that at some point, perhaps in the
not too distant future, there would be another significant correction in the
S&P 500. While nothing guarantees that past performance will be repeated,
it presents another data point worth watching.

** *** **
International Equities
The international economic situation is complex and very region and country
specific.

For the Eurozone, GDP growth of about 1.5% translated into a small decline
for EMU equities in 2015. For 2016, the outlook is for only a small improvement. Dollar strength along with accommodative policy from the ECB and
growing capacity utilization will help to keep Europe out of recession despite

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast

being dogged with high unemployment (twice the level of the U.S.).

cial and economic headwinds. With 2016 GDP growth expected to continue

Japan emerged from recession in the second quarter of 2015 but continues

to exceed 7%, India equities bearing watching for a turnaround.

to have structural (especially demographic) problems in addition to suffer-

Since the beginning of 2011, Latin American region equities and the rate of

ing from reduced demand for exports to China. One positive factor that

change in GDP have been in a downward trajectory, largely driven by Brazil

sets Japan apart is the willingness to take fiscal measures to support the

and Chile and, since 2013, including Mexico and Peru. The reasons are com-

economy (not relying entirely on monetary policy) although its not clear

plex and include both economic factors (declining commodities) and politics.

whether policy will be strong enough. Meanwhile, for all its troubles, Japan

In light of the current global economic slowdown which has been taking a toll

had one of the best equity performance outcomes in 2015, pulled forward

on oil, copper, precious metals and other commodities, not to mention politi-

by its financial sector. For 2016, the outlook is for GDP growth in the 1%

cal challenges in Brazil, theres little reason to expect a significant turn-

range, similar to 2015.

around in the foreseeable future for countries in the region.

China equities struggled in 2015, turning in a negative performance as the


country adapts to a lower rate of growth (still a healthy 7%) and conversion
to a more consumer-led economy the impact of which is being felt
around the world in the form of less exports of commodities to China. The
outlook for 2016 is more of the same although surprise moves by the government have a way of shaking things up.

Canada, like other commodity exporting countries, had a difficult year in


2015 with GDP growth slipping from about 2.5% in 2014 to about 1.2% in

With GDP growth in excess of 7% and expanding foreign direct investment,

2015 and the Toronto Stock Exchange slipping about 9%. A recovery in Can-

I expected a stronger return from India equities in 2015 than what we actu-

ada, like a recovery for other commodity producers, will depend upon im-

ally experienced (the Bombay stock exchange declined over 5% for the

proved global demand and a recovery of some type in the price of oil. I am

year). The culprit seems to be exports that fell to their lowest level in 5

not convinced that such a recovery will take place in 2016.

years. The challenge in India is a complex environment with structural, so-

** *** **

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast


Interest rates

2016 PREDICTIONS

While theres been a lot of focus on the Federal funds rate lately, and under-

So, if you are still with me, here are my predictions for 2016. They apply to mar-

standably so, the 10-year government bond rate in the U.S. and in other major

ket conditions that are evident today. Paraphrasing Keynes famous comment, if

developed markets deserves similar attention as this rate has considerable in-

market conditions change, Ill change my opinion. Wouldnt you?

fluence on the economy and investments. A very high rate snuffs out borrow-

U.S. Equities

ing and can draw investor funds from equities to bonds while a very low rate
motivates investors to seek higher returns, drawing investor funds out of
bonds and into equities, taking on increased risk in the process. With the current U.S. 10-year Treasury bond yielding 2.27% just 10 basis points above

With the slowdown in global growth and weakness in U.S. profits, Im expecting
another year like the one we had in 2015 with the S&P 500 advancing 3-5% with
risk to the downside.

where 2015 began its in the very low rate environment that we find our-

On a sector basis, I expect healthcare (especially biotech), technology, con-

selves today.

sumer discretionary and regional banks to outperform the S&P 500. But heres

While the U.S. 10-year yield is not far from its historic low point of 1.5%, it is
important to note that it is considerably higher than comparable bond yields
in the Eurozone, U.K., Japan, and Canada, and roughly the same as in China,
South Korea and Australia. Interestingly, the comparable bond yield in India is
an outlier at about 7.75%.
As the U.S. rate barely budged following the Feds December rate hike nor for
the year as a whole, the relationship with comparable rates in other developed
economies illustrates the demand for the strength and safety of the U.S. dollar
(up about 8% in 2015). I expect the same pressures will continue in 2016 with
only a modest change for the year.
** *** **
Summary
While, on balance, Im expecting equity and bond performance in 2016 to be
very similar to 2015, as discussed in preceding paragraphs, there are some
hints that equities could be in store for a significant correction. Beyond those
technical considerations, geopolitics and terrorist activities have the world on
edge. The U.S. presidential election adds uncertainty. Investors should review
their risk tolerance and be prepared for volatility and market disruption.

a concern. Recall comments on page 6 about the lack of market breadth. In


the case of the popular consumer discretionary ETF (XLY), 30% of the portfolio
is represented by 4 stocks and in the case of the popular technology ETFs
(QQQ and XLK), 40% of the portfolios are represented by 5 and 4 companies,
respectively. So theres some danger there that a reversal in just a few stocks
could upend the performance of the entire sector. Heres how those sectors
performed compared to the S&P 500 in 2015 using representative ETFs for
each sector. Of course, while I believe these will be the outperforming sectors
again in 2016, theres no guarantee that past performance will be repeated.

L a n e A s s e t M a n age m e n t

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2015 Review and 2016 Fearless Forecast


International Equities

bonds to be very close to zero consistent with a small increase in the 10-year

My estimate for total return from international equities, as measured by the

Treasury bond yield. As with 2015, I believe the best opportunities for income

Vanguard All-world (ex U.S.) fund,VEU, is 0% to 2%. I believe the international


equity returns will be very region specific with developed markets leading the

investing will come from preferred stocks, especially in the financial sector, and
REITs. Heres how representative ETFs performed in 2015 and keeping in mind

way and commodity-producing regions lagging. Improving dollar strength will

that past performance does not guarantee future results.

benefit investments in developed economies that are hedged against the dollar.

If the S&P 500 meets my goal for 3-5%, I believe it will continue to reflect the

The hedged regions that I believe will outperform the broad (unhedged) index

strength of a limited-breadth market which did not favor dividend-paying stocks

in 2016 are Japan, Germany, and the Eurozone. Heres how ETFs representing

in 2015. Therefore, Ive dropped them from my outperform list for 2016.

these three areas (unhedged and hedged) performed in 2015 compared to the
broad international index,VEU. Again , past performance does not guarantee
future results.

** *** **
Bonds and Other Income Securities:

This completes my 2016 Fearless Forecast. It reflects my view that investment

The 10-year Treasury yield surprised everyone again in 2015 with very little up-

returns have moved into a new, lower trajectory on account of the slowdown in

ward movement. I expect the same in 2016 despite a few Fed funds rate hikes

global growth caused in part by Chinas slowdown, but also by the unwillingness

and believe it will end the year near 2.5%. Total return for 7-15 year U.S. gov-

of developed nations, including the U.S., to make the necessary fiscal interven-

ernment bond funds in 2015 was about 1.4% while investment grade corporate

tions (read: investments in infrastructure, innovation and education) required to

(IGC) bonds funds declined about 1.3%. For 2016, I expect total return for IGC

support a higher level of sustainable growth. In the following pages, I provide


additional technical perspective on todays markets. Thank you for reading.

L a n e A s s e t M a n age m e n t

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S&P 500 Total Return


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 average 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 that
fewer 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 relatively 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 indication of which outcome we can expect to see.

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

L a n e A s s e t M a n age m e n t

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S&P 500 The Longer Term View


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 in
the 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 reenter) or a willingness to ride out a condition that could last for months or longer.

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.

L a n e A s s e t M a n age m e n t

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Portfolio Protection
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 exponential moving average (50EMA) and the green line is a 25-week exponential moving average (25EMA). When
the 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 exposure, 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 its 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 dont 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.

Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t

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All-world (ex U.S.)


International equities, represented here by Vanguards 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 major destination for foreign direct investment, the long term outlook is good. Other countries worth examining include Japan and Europe on a
dollar-hedged basis.

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.

L a n e A s s e t M a n age m e n t

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Asset Allocation and Relative Performance


Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. One useful tool Ive
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.

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.

L a n e A s s e t M a n age m e n t

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Income Investing
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 began to respond to the increased likelihood of the Fed funds rate increase. At this stage, we have a virtually flat channel of performance with weakened trend in the last two months along with a loss of momentum.
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 correlation 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.

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.

L a n e A s s e t M a n age m e n t

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Asset Allocation and Relative Performance


In this chart, we see the continuation of a pattern of outperformance of U.S. equities relative to an index of investment grade corporate 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.

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.

L a n e A s s e t M a n age m e n t

Page 18

Income Investing
In this chart, we have the relative performance of the S&P U.S. Preferred Stock Index ETF (PFF) to investment 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 below, 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.

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.

L a n e A s s e t M a n age m e n t

Page 19

U.S. Dollar
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.

Page 20

L an e A ss et M an ag em ent
Disclosures
Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Management is a Registered Investment Advisor with the States of NY, CT and
NJ. Advisory services are only offered to clients or prospective clients
where Lane Asset Management and its representatives are properly licensed or exempted. No advice may be rendered by Lane Asset Management unless a client service agreement is in place.

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 arent predictive of any future
market action rather they only demonstrate the authors opinion as to a range of possibilities 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-

Investing involves risk including loss of principal. Investing in interna-

tained herein or any decision made or action taken by you or any third party in reli-

tional and emerging markets may entail additional risks such as currency

ance upon the data. Some results are derived using historical estimations from available

fluctuation and political instability. Investing in small-cap stocks includes

data. Investment recommendations may change without notice and readers are urged

specific risks such as greater volatility and potentially less liquidity.

to check with tax advisors before making any investment decisions. Opinions ex-

Small-cap stocks may be subject to higher degree of risk than more es-

pressed in these reports may change without prior notice. This memorandum is based

tablished companies securities. The illiquidity of the small-cap market

on information available to the public. No representation is made that it is accurate or

may adversely affect the value of these investments.

complete. This memorandum is not an offer to buy or sell or a solicitation of an offer

Investors should consider the investment objectives, risks, and charges

to buy or sell the securities mentioned. The investments discussed or recommended in

and expenses of mutual funds and exchange-traded funds carefully for a

this report may be unsuitable for investors depending on their specific investment ob-

full background on the possibility that a more suitable securities trans-

jectives and financial position. The price or value of the investments to which this re-

action may exist. The prospectus contains this and other information. A

port relates, either directly or indirectly, may fall or rise against the interest of inves-

prospectus for all funds is available from Lane Asset Management or

tors. All prices and yields contained in this report are subject to change without notice.

your financial advisor and should be read carefully before investing.

This information is intended for illustrative purposes only. PAST PERFORMANCE

Note that indexes cannot be invested in directly and their performance

DOES NOT GUARANTEE FUTURE RESULTS.

may or may not correspond to securities intended to represent these

Periodically, I will prepare a Commentary focusing on a specific investment issue.

sectors.

Please let me know if there is one of interest to you. As always, I appreciate your feed-

Investors should carefully review their financial situation, making sure

back and look forward to addressing any questions you may have. You can find me at :

their cash flow needs for the next 3-5 years are secure with a margin
for error. Beyond that, the degree of risk taken in a portfolio should be
commensurate with ones overall risk tolerance and financial objectives.

www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com
Edward Lane, CFP

The charts and comments are only the authors view of market activity

Lane Asset Management

and arent recommendations to buy or sell any security. Market sectors

Kingston, NY
Reprints and quotations are encouraged with attribution.

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