Thankfully, large swings in foreign exchange rates or commodity prices have diminished impacts over time, and we expect a more stable US dollar and commodity prices in 2016. In the US, we focus on those sectors leveraged to the ongoing US economic expansion, that generally have favorable earnings momentum, and/or trade at compelling attractive valuations.
We also still favor small caps over large and mid-caps. In fixed income, we still prefer investment grade US corporate bonds. IG bonds feature wider spreads than they have for several years, and therefore already reflect the risks inherent in the credit cycle. The asset class remains an important portfolio diversifier during periods of increased volatility and sell-off in risk assets.
In 2015, stingy markets offered no magic formula for beating benchmarks. We look to the year ahead with optimism, but investors will need to keep return expectations contained, raise their tolerance for volatility, and stay selective.