Given the recent market volatility we thought we would provide you with a brief update.

When we titled our year end quarterly update “2016 — The Year of Careful,” we should have been more specific and included the caveat “The First Week!” Since the beginning of the year, the Dow has declined over 900 points or a little over 5 percent! Though this is a rough start to the year, it is still in the confines of a normal correction. In fact, since their global market high in July, indexes are still within normal correction territory. Although it may not feel great, we have been through this many times since the bull market began some seven years ago. However, the volatility and lack of market progress should be a warning sign of potential risk ahead.

Global market indexes – the S&P 500 included – are at the same level as 18 months ago. Though indexes have gyrated up and down, there has been little progress. Within the indexes, there has been significant deterioration – if not full-fledged bear markets – in some sectors including material and energy stocks, much of which we have avoided. As we have discussed previously, these are signs of an aging bull market and economic cycle. For these reasons, we stand ready to become more risk averse with your allocation to stocks, sector exposure and the use of carefully placed stop loss orders.

At this point, markets remain within correction territory and, on many levels, appear oversold. This set of data points often leads to a significant “bounce” upward in equity prices, which may provide some relief for investors who have reached high levels of anxiety. This is the kind of market action to which we all look forward.

Beyond the short term of this past week, we believe investors should be very careful this year and remove stocks and sectors that are not working in favor of those that continue to achieve consistent profit growth – namely healthcare, consumer staples and utility companies – all of which your portfolios are overweight in and are holding up much better than indexes.

We hope this brief update is helpful. We will be watching all of these dynamics very closely and look forward to a better remainder of 2016!!

Sincerely,

Your Team at Main Street Research