US stocks, as measured by the S&P 500 index, are clinging to a small decline for 2015 as the year is coming to a close. The Federal Reserve met earlier in December and increased benchmark interest rates by 0.25% for the first time since 2006. Meanwhile, the US unemployment rate has been steadily declining throughout 2015 while US GDP has been hovering around a not so hot but not so cold 2%. Amid this steady, but somewhat slowing, recovery in the United States, there have been many concerns about the slowdown in the Chinese economy and the impact this will have on global demand. Concerns about China are coupled with concerns about Europe as the ECB (European Central Bank) is still in the midst of stimulating the economy there through monetary policies that have caused the Euro currency to lose 10% of its value against the US dollar in 2015 and 20% since the beginning of 2014.
Amid this economic picture, we see continued concerns in US and Emerging Markets stocks. We believe capital preservation should be of paramount concern as we enter the first half of 2016 as we believe that dividend and interest income will likely make up a big portion of total returns next year. As such, effective today, we have adjusted our asset allocation models to reduce overall portfolio risk and increase sources of income. Overall, we have increased allocations to government bonds and REITs while we reduced allocations to emerging markets, mid and small capitalization stocks. We have also reduced our exposure to (investment grade) corporate bonds in favor of more exposure to Treasury bonds. We believe that there is a high risk of contagion in the fixed income market due to snowballing fears of an iminent liquidity-driven sellof in the high yield (junk) bond market.