Glen Ellyn Wealth Advisors



FORD WEALTH MANAGEMENT LLC

Integrity•Independence•Insight

536 Pennsylvania Avenue

Glen Ellyn, IL 60137

630.545.2800



Erik G. Ford, CRPC®, AIF®, CFP®

Principal Partner

erik.ford@

Trent E. Warren, CRPC®, AIF®

Partner

trent.warren@

January 11, 2016

“The past cannot remember the past. The future can’t generate the future. The cutting edge of this instant right here and now is always nothing less than the totality of everything there is.” Robert M. Pirsig from Zen and the Art of Motorcycle Maintenance.

Fellow Investors,

As this is written it seems a bit nostalgic to recap 2015 since the opening week of trading in 2016 has been so dramatic in world markets. We will briefly set the table and move on. The results for 2015 were certainly a disappointment across the board, but we did finally get our long awaited interest rate bump by the Fed. The total return (assumes dividends reinvested) of the S&P 500 for the year was a paltry 1.38%. That is pretty much where the good news ends. The price return (excludes dividends) was a loss of 0.73%. As is the case most of the time, the headlines can be deceiving. Gains were primarily in growth stocks (Russell 1000 Growth up 6.37%, Russell 1000 Value down 2.90%) and the returns that were realized were very focused. According to BOK Financial Corporation the top performing 10 stocks in the S&P returned a stunning 25.9% in 2015, while the remaining 490 lost 1.1%. That, folks, is the very definition of a narrow market. This full year performance also does not fully describe the ride we experienced over the course of the year as the S&P 500 ranged from a high of 2134 to a low of 1867 and those two points were reached about a month apart.

The only other major sectors posting positive returns for the year (according to JP Morgan Asset Management) were REITS (2.8%) and Fixed Income (0.5%). The latter as measured by the Barclays Aggregate which is heavily weighted toward treasuries and mortgage backed securities. The bottom performers were commodities (-24.7) and emerging markets (-14.6). Ouch!

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Now the new year has started out with a bang, but not the kind of bang we like to see. The S&P 500 was down about 6% after the first week. As for that narrow market referenced above, the top 10 positions in the S&P 500, representing 17.6% of the index, were down 6.9% on a weighted average and 7.6% on an arithmetic average, and this was just the first week. The Nasdaq, which was actually up in 2015 (thanks tech and growth) was down 7.26% at the end of the week. Why such a dramatic start and what can we take from it?

The word on everyone’s lips is China, and what’s happening in the world’s biggest “emerging market” is a valid concern. As discussed in previous letters, the world has never experienced an economy as large as China’s going through the transition it is going through at the speed at which it is transforming. Add to that the suspicion, or to many the certainty, that Chinese data are unreliable and that their regulators and decision-makers are painfully inexperienced, although perhaps not lacking in confidence. It is a recipe for uncertainty. This first week the Shanghai index dropped 10%. Even sharper day to day, and intra-day, movement rippled through other world markets. The implementation of “circuit-breakers” in the Chinese stock market to halt trading was intended to smooth trading and instead only seemed to make things worse before being abandoned after less than a week. At times it was reminiscent of the scene in The Wizard of Oz when Toto pulls back the curtain and exposes the wizard as a fraud.

We are not suggesting that the Chinese economy is a fraud, but it, like the great Oz, certainly may not be all that it seems. The learning process for communists encouraging capitalism can be rough. The beauty of capitalism is that capital will flow to its best use when left unrestricted. When restrictions are implemented or biases introduced, things can go in unexpected directions and uncertainty increases. We have seen that in Russia and China as capital is misallocated by government objectives and cronyism. This has always plagued developing economies, now we just have bigger ones and more interdependence. One of China’s big problems now is capital flight as those that have been able to manipulate the system to gargantuan gains seek to move their capital out of the system and into a stronger currency and more stable markets. That does not instill confidence for the rest of the world. It also does not mean the future of China is economically bleak, just bumpy, unpredictable and prone to cause volatility. Not for the faint of heart.

This is not to lay all the blame for 2015’s disappointment and the first week of 2016’s blow-off on the Chinese economy. There is plenty of blame to go around. The three primary factors affecting today’s markets are uncertainty, uncertainty and uncertainty. The world is not making our lives easy and predictable and when risk is perceived to be higher, we as investors expect to be paid for it. That means current values go down and volatility goes up. This is actually not a bad scenario for the long term investor with patience and perspective, but it is hellish for the short-term oriented and squeamish.

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An investor’s greatest asset can be temperament, paying greater dividends than any stock in their portfolio.

This is not our father’s economy. It’s not even our older sister’s economy, but it is not an economy to run away from. We have discussed some of the tectonic shifts being realized through the implementation of technology, energy discoveries and shifting demographics. The Chinese are seeing the strength of freer markets, but are realizing that trying to have a little bit of capitalism may be like being a little bit pregnant. Eventually they will either be outfitting the baby’s room or have a billion plus very unhappy people who won’t be distracted by a kerfuffle in the South China Sea over a couple of tiny islands. Now that is an uncertain outcome, and it is being reflected in our markets.

We continue to see strength in the US economy. The Fed saw fit to raise interest rates by ¼% in December largely on the strength of employment performance. Inflation is still below their target due to soft wage pressure, low energy prices and a surging dollar. The increase was as much for credibility as actual impact. The Fed indicates that they expect to raise rates four more times in 2016, but at this point the markets are skeptical and are pricing in only two or so increases. Sifting through 2015 it is important to separate the wheat from the chaff as the sharp decline in oil prices did a number on the earnings of energy companies and related capital investment. While still soft, we believe the price decline is likely to be near the bottom and the damage is done and there will be benefits from low prices. While this economic up-cycle is long by historical measures, there is no maturity date and the growth rate certainly has not been robust enough to burn out. We are not saying 2016 is going to be gang-busters (we specifically don’t make predictions), but we want to dissuade anyone from running for the hills. If you think it is tough to sleep with current market volatility, try sleeping on a lumpy mattress stuffed with cash.

By the time this is read, the earnings reports will have started to come out and provide more solid evidence as to what is happening in the US economy. Analysts and predictors have a lousy record, but still get the attention of the markets. Short-term reactions to preliminary numbers that are subject to revision, sometimes large revisions, only add to uncertainty and volatility, but human nature is such that we can’t help ourselves. And we haven’t even mentioned in the above the threats of global terrorism, missiles and bombs tested by rouge states, or some kind of election this fall. That takes us back to temperament.

We all have financial goals we are trying to reach. The performance of 2015 interrupted progress toward those goals for most investors and the first week of 2016 only compounded the issue. That is going to happen. To quote Brain Wesbury, the Chief Economist of First Trust, “Volatility is the price you pay to make money as a long term investor”. Perhaps we should make an exception and make a prediction. We predict that the US and world economies will be significantly larger in ten years than they

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are today and your phone will do something you haven’t even thought you needed (if we still carry phones). How is that for going out on a limb? After all Amazon is actually opening brick and mortar stores and McDonald’s is serving breakfast all day. Anything can happen, but you have to play to win.

Sincerely,

Erik G. Ford Trent E. Warren

The Standard and Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

The Russell 1000 is an index of approximately 1,000 of the largest companies in the U.S. equity markets, the Russell 1000 is a subset of the Russell 3000 Index. The Russell 1000 (maintained by the Russell Investment Group) comprises over 90% of the total market capitalization of all listed U.S. stocks, and is considered a bellwether index for large capinvesting. The Russell 1000 is a market capitalization-weighted index, meaning that the largest companies constitute the largest percentages in the index and will affect performance more than the smallest index members.

The Nasdaq 100 is an index composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies.

The Barclays Capital Aggregate Bond Index is maintained by Barclays Capital and is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented.  The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine

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which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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