2016 Financial Market Recap
The stock market had a solid end to what had been a choppy year. U.S. Equities, as represented by the S&P 500, were up 3.82% for the fourth quarter and 11.96% for the year including dividends. Most of the broad asset classes finished in positive territory. One standout was the Small Cap space within U.S. Equities. The Russell 2000 Index was up 8.80% in the last three months of the year and 21.30% for the year including dividends.
Bonds lagged stocks, but did end the year with positive returns, considering both income and price appreciation. Another big story was Commodities, which had seen dreadful returns for the past couple of years. The rally in Energy and Precious Metals propelled commodities up about 11%, although that is still a long way from making up past losses.
International stocks, as measured by the EAFE index still struggled but were able to add 1.4% including dividends. The Emerging Market stocks did have a great run and added about 11% but again did not make up for steep losses in 2015. This underperformance means these areas are still the most attractively priced in the stock markets.
Going forward, the consensus of most investment strategists is for a positive year particularly for US stocks. Within that positive outcome however, lots of things could change within the markets. In 2016, the stocks that increased the most were in the more stable, dividend-oriented areas like utilities and energy. It seems that for 2017 the areas of the stock market that could see greater increases are those that do better in high growth conditions, like financials and industrials.
2017 Financial Market Thoughts
With proposed infrastructure investments, tax reforms and regulation reductions more support for corporate earnings is expected, resulting in an increase in stock prices. This could be offset by inflation increases due to increased interest rates and trade protections. One thing to remember is that we have had very little price volatility in the stock markets over the past few years. Going forward, there could be some sharp jolts as the year unfolds.
Lost in the shuffle of the fourth quarter was the Federal Reserve raising rates for the first time in a year. The move was largely expected, but that didn’t prevent bonds from having a rough quarter. The positive return from bonds for 2016 was largely earned in the first part of the year. The Barclays US Aggregate Index was down –3.00% for the quarter so the fear of rising rates among investors is real.
Trends in the markets come and go every year. The way forward for investors is to maintain an investment allocation across all types of investments, suitable to how much time you have left before retiring. Over time, the trend for the markets has been up, and there is no reason to think that will change. While we have no idea whether 2017 will be a positive or negative year, we have every reason to think that by 2027, the markets will be higher than they are today.