Over the last 18 months global and domestic stock indexes have made no progress amidst tremendous volatility. Strangely, most broad indexes are at the same level as the fourth quarter of 2014! This lack of progress over such a long time period is unusual but not unprecedented. Though these periods of lackluster returns can be very trying for investors, they are almost always followed by tremendous returns over the following few years. In fact, historically, once markets get out of these “funks,” the first year of upward price performance can be outright astonishing – rewarding the patient investor and once again fooling those that went elsewhere for investment return.

Our concern about the market over the past 12 months is well documented and, in hindsight, has been validated by a lack of upward progress in most global stock prices. As you know, most of our concerns have been based on the late stage of the economic cycle, the potential lack of economic growth, Fed policy, and the deterioration of many sectors of the market. Our view had been that most stocks – with the exception of consumer staples, healthcare and utility shares – were overpriced for an economy and corporate earnings growth that were in decline. During this time we have had less – and more defensive – stock exposure with more fixed income and money market funds than normal. While not a long-term strategy, this has reduced your volatility during a period when many stocks in many sectors have declined significantly – namely those companies which are sensitive to economic growth: energy, materials, industrial, technology and financial stocks (most of which you did not own or had little exposure). Many of these sectors and stocks have fallen by a whopping 20-50%. These types of declines are classic bear market measures and very well may spell “opportunity time” for the longer term investor – like us!

We have described this as a “teddy bear” market given its lack of overall index decline such as in 2002 or 2008, but rather rotating weakness from one sector to the other. Bear markets come to an end through a combination of two factors: time and price. Historically, the average bear market lasts just over 12 months and we would suggest we are very close to that time frame. In terms of price, many stocks and sectors have experienced bear market declines – they just did not decline at the same time, hence our “teddy bear” analogy.

Are we suggesting that this period of lackluster stock performance has come to an end and that a new bull market is now upon us? Not quite yet. However, this is the time that we want to consider opportunistically phasing into some of what we believe are the best quality companies from around the world that have already discounted all of the bad news. We have recently compiled a list of these great companies for you and will be carefully considering purchases in a timely and cautious fashion.

On the fixed income side of your portfolio, we continue to look for yields of 3-5% in individual securities – bonds and alternatives to bonds such as preferred stocks, real estate investment trusts (REITs) and utility stocks. We would caution investors, friends and family members against investing in bond funds or bond exchange traded funds (ETFs) as these investments have less liquidity than one may think and may suffer significantly in a rising interest rate environment.

We are aware that there is a long list of prevailing risks in today’s world including the upcoming election, Brexit, economic growth and Fed policy. However, it is quite possible and highly likely that most of these issues will be resolved in coming months. Keep in mind that markets are a discounting mechanism and that stock prices rise and fall before the actual events transpire, creating opportunity for longer term investors. We recognize that the coming months may be unpredictable and create more downside – and upside – in stock prices. Therefore, we will remain careful in our approach but with an eye on opportunity for your portfolio and the growth of your wealth over the next few years.

Now that we believe that most of the poor market conditions are behind us, we are excited about the prospect of once again enhancing the value of your portfolio. In the meantime, should our “teddy bear” turn into something ferocious, we will continue to manage your portfolio’s risk through your asset allocation, sector management and the use of carefully placed stop loss orders. Each of these tools are part of our unique Active Risk Management (ARM) process that has served us well in past bear markets.

If you have any questions about your portfolio, or would like to share any thoughts please let us know. If you have experienced any significant change in your financial circumstances please feel free to give us an update. Otherwise, thanks again from all of us for your vote of confidence in our work.