While 2015 had its share of volatility and ended with virtually no gains in stocks, 2016 sprinted to the downside with volatile global markets, a bifurcated U.S. economy, and the first rate hike in a decade.

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As we outlined in October, the global economy is slowing and the issues in China and emerging markets are at the epicenter of the world’s problems. By our estimates, between 30-50% of world GDP is directly or indirectly linked to China’s growth through various trade links. So while some believe that the U.S. economy is strong enough to simply brush off the effects of a major slowdown in China, we feel that decoupling is a dangerous possibility. Furthermore, while our base case has been that the U.S. will be able to maintain a low trajectory growth path, we believe the U.S. is currently slowing, as the drag in world trade is now showing up.

We believe the combination of an aged bull market, poor valuation, and a technical backdrop that has finally broken down, has produced an environment that demands ongoing risk management. To manage the risk in our portfolios, we have been adjusting our holdings by selling some risk assets and exchanging others for holdings with less risk. This has been a gradual process as we monitor many factors to guide our decisions. We continue to take a cautious approach in managing our portfolios and have further reduced the risk over the past two weeks. The changes within our portfolios have been primarily rotations between U.S. and International markets, and the general theme is to own more defensives and less cyclical holdings. In the fixed income area, we moved out of a merger arbitrage alternative to reduce our exposure.

As we move forward in 2016, the market’s path will be determined by a variety of factors including how stocks digest the central bank policy, inflation, currency volatility, and earnings/valuation. Looking forward, one of the silver linings to any correction or a bear market is that it tends to produce cheaper valuations which can lead to a wider margin of safety that actually improves the long-term return profile for equities. As we manage risk in a down market and raise cash, it provides us with the opportunity to buy assets at cheaper prices to build long-term wealth.

For more information about our outlook and strategy going forward, please look for our 2016 Market Outlook later this month.