Market Update: Fourth Quarter 2016

2016 has to be one of the more fascinating years we have had in some time. From the rocky start in the stock market right out of the gate, to the toxic political environment during the presidential election, to the untimely deaths of a number of iconic musicians and actors, it seemed like 2016 had it all. For some, it was fitting that 2016 was capped off by Mariah Carey’s NYE “performance.”

Many are excited to put 2016 behind us and forge on to the New Year. However, we would be remiss if we didn’t sift through the seemingly limitless spate of negative news to highlight a number of positive events that happened in 2016: Team USAs dominant performance in the Rio Olympics, the U.S. unemployment rate fell below its pre-recession low, the lovable loser Cubs won the World Series, America’s teen graduation rate reached an all-time high while the teen birth rate reached an all-time low, the Americas were finally declared measles-free, and we had the first ever woman to lead a major political party’s ticket.

Another positive–the stock market reached a new all-time record high, again! It’s hard to imagine we would be at this point, given the poor start to the year plus the number of unexpected events we experienced throughout 2016. Even if we knew what events would unfold, there is no way anyone could have predicted how investors would react to those events. That’s the challenge for all investors. If we knew, in advance, that the stock market was going to get off to the worst start EVER, that in a stunning June referendum the UK was going to vote to leave the EuroZone, and that Donald Trump would shock the political world by winning the US presidential election, we STILL wouldn’t be able to forecast how investors as a whole would view those events.

For the second year in a row, the fourth quarter provided investors will solid gains. The S&P 500 index of large company stocks was up 3.3% for the quarter, and finished up 9.5% for the year. This was also a year to remember for investors in small company stocks, which posted an 8.3% gain for the quarter and a total return of over 22% for the full year.

International investments, rocked by Trump’s win, increased terror attacks and Brexit, contributed a slight decline to overall portfolio returns for the quarter. Companies in developed foreign economies lost 1.2% in the fourth quarter of the year, but managed to finish up 2.8% for the year. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, gained 11.2% for the year.

Looking over the other investment categories, real estate investments lost 2.3% during the year’s final quarter, but managed to finish up 7.2% for the year. Commodities, which left investors wondering why they owned them in their portfolio last year, rebounded 14% in 2016.

In the bond markets, it’s possible that the decades-long bull market—which basically means declining interest rates—has ended, and the fixed-income world experienced rate increases during the second half of 2016. After hitting an all-time low on July 5th on the heels of the Brexit vote, the 10-year Treasury Note ended the year slightly above where it started. Time will tell whether or not this trend will continue. There have certainly been many false starts in recent years, but interest rate increases should ultimately be beneficial to those who, like us, are holding shorter-term bond funds, as the proceeds from maturing bonds in the fund are reinvested into bonds with higher interest rates. This is positive for long term investors.

In spite of everything that happened in 2016, investors in a well-diversified portfolio had a pretty darned good year. We definitely had to hold our noses at times, but all who were able to tune out the noise and stick to well-thought out plans were handily rewarded.

What’s going to happen in 2017? After the year we just had, if anyone says they know for certain what is going to happen AND what that will mean for markets around the world, we would advise you to run, not walk, away from that person. As a result of the presidential election, and the president-elect’s proposed policies, investors seem to be expecting a robust economic stimulus combined with lower taxes and deregulatory policies. That could boost the short-term profits of American corporations. The post-election rally would suggest that is what investors are expecting.

We should have a better idea in the coming months as the new administration lays out its policy proposals. As in 2016, we are bound to experience unexpected bumps along the way. Instead of trying to time those bumps, it is best to accept them as part of the investment process and use them to your advantage, and not run for the hills. The past few years’ results have only reinforced our core belief that the markets always have a way of surprising us, and that trying to time the market and get out in anticipation of a downturn, is a loser’s game. At the county fair, when we get on the roller coaster, we don’t bail out and jump over the side at some scary point on the track; we hang on for the ride. The history of the markets has been a general upward trend that benefits long-term investors. Those with the proper perspective will have a much easier time remaining disciplined and living through the occasional bumps and bruises that occur along the way.

Happy New Year to you and your family!

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