2016, which began with great pessimism, ended with enormous optimism. It was full of surprises and probably the most interesting year since the financial crisis. We launched the year with a sharp sell-off due to growing concerns about China’s economy and fears that the Fed would raise rates too quickly, but by the end of the 1st quarter the markets recovered. June brought us the surprise Brexit vote which resulted in a momentary selloff. But the markets remained resilient and needed only a handful of days to recover.
Similar to the 3rd quarter’s surprise Brexit vote, the 4th quarter was surprised by a Trump victory in our presidential election. This time the market’s negative reaction was reversed before markets closed here in the US and since then, stocks have pushed solidly higher. In addition, bond yields have climbed and the dollar has appreciated. The S&P’s post-election run is one of the best in history, but to put it into proper context, the 4.2% gain for the 4th quarter is only about average when you include non-election years. The S&P crossed over the 2200 mark for the first time and closed up just shy of 12% for the year. As a matter of fact, the S&P, Dow, and Nasdaq all closed at historic highs for the first time in 17 years, but the big story was in small caps. They had a great year, with the Russell 2000 returning over 21%.
The US economy remained relatively strong with US GDP growing .8% in the 1st quarter, 1.4% in the 2nd quarter and 3.5% in the 3rd quarter. Unemployment fell to 4.7% by year’s end. As a result, the Fed raised rates 25 basis points in December. Consequently, the 10 year Treasury, which started the year at 2.27%, and fell to a low of 1.36% in July, closed the year at 2.44%.
In contrast, European and Japanese central banks continue to ease in an effort to stimulate their economies. European economies have improved, but Japan’s growth remains basically flat. China avoided a hard landing, but concerns about their long-term growth prospects continue to linger as public and private debt levels have sky-rocketed. For investors, developed foreign stocks managed to eke out a minor gain, while emerging market stocks produced double digit returns.
In November, OPEC and Russia agreed to production cuts in oil which could eliminate the supply glut we have seen recently. As a result, oil managed to trade in the $45-$53/barrel range, which should help energy company earnings going forward. It also enabled commodities, in general, to move up 2.66% for the quarter and 11.8% for the year.
Because of the rise in interest rates since the presidential election, real estate (outside of the Northwest) fared poorly during the 4th quarter with the NAREIT Index losing 3.3%. For 2016, however, the Index managed to grow a respectable 8.6%.
Despite the rise in European nationalism stemming from terrorist activities, the ascendency of Russia in the Middle East, and the push away from democracy in Turkey, volatility remained at bay. The consequence for our risk management strategies was mixed, with market neutral strategies providing equity-like returns, hedged equity and global macro strategies providing returns falling somewhere between the returns of stocks and bonds, and managed futures losing ground.
So, despite investor glee, we remain cautious. The market has priced in a lot of the perceived benefits from the new administration, but even if these changes come to fruition, it will be quite some time before the effects are felt.
For more on 2016, please look out for our upcoming video.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 20 years of portfolio management and investment experience. Rick designs and implements investment and risk management strategies for the bank’s clients. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in the Journal of Investment Management and Financial Innovations, as well as, the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.