2016 Market and Economic Re-Cap

From crashing oil prices that fueled Wall Street’s worst-ever start to a year, to unpredictable political events like Brexit and the election of Donald Trump, the year in stocks was not for the faint of heart.

The U.S. stock market began 2016 with the worst start to a year in history.

In the first week alone, the Dow Jones, S&P500, and NASDAQ fell 6.19%, 5.96%, and 7.26%, respectively, due to concerns about China’s economic slowdown and plunging oil prices.

By mid-February the S&P500 was down 9.12%, while the Dow Jones and NASDAQ were down 8.68% and 12.98%, respectively. Fast forward to the end of 2016 and you saw a completely different story with all three major indexes posting healthy gains to end the year. The Dow was up 13.4%; the S&P 500 gained 9.5%; and the NASDAQ was up 7.5%.

Much of these gains came toward the end of the year, specifically after Election Day. US markets have been heavily guided by expectations that the Trump administration will engage in reflationary fiscal measures, such as corporate and personal income tax cuts, deregulatory initiatives, and infrastructure spending. All measures, naturally, are designed to boost business activity and generate an increase in aggregate demand. From November 8th to December 31st the S&P and Dow Jones rose 4.4% and 7.7%, respectively, while the tech-heavy NASDAQ increased by 4.2% in the same time period.

Using SPDR funds as a reference, top sectors for 2016 included Energy, Financials, and Industrials while lagging sectors included Consumer Staples, Consumer Discretionary, and Biotechnology.

Biotechnology, fueled by incredible innovation and rapid revenue growth, skyrocketed more than 400% between July 2010 and July 2015. In 2016, Biotechnology funds IBB and XBI lost 18.81% and 12.75%, respectively, as Washington politicians spoke about curbing dramatic drug price hikes.

The Russell 2000 Index advanced 21.3% in 2016. This terrific result stood in stark contrast to 2015's negative return. It also reversed two years of underperformance versus large-cap, as the Russell 2000 handily outperformed the Russell 1000 (+12.1%) and S&P 500 (+12.0%) Indeces.

The yield on the benchmark 10-year Treasury note closed at 2.446% on 2016’s last trading sessions, up from 2.273% at the end of 2015, generating the second consecutive year of price declines for the $14 trillion bond market. However, yields tumbled nearly a percentage point by the middle of summer with the 10-year treasury hitting a record low of 1.366% in early July. The rally that followed between October and December saw the Treasury yield climb 0.841 percentage point, the largest quarterly gain since 1994.

In the U.S. fixed-income market, junk bonds, or corporate debt sold by lower-rated firms, returned 17% this year. Higher-rated U.S. corporate bonds have logged a return of 5.8%, and U.S. municipal bonds have posted a return of 0.2%. Treasury inflation-protected bonds, or TIPS, posted a return of 4.3% amid strong demand for inflation protection.

The Federal Reserve showed increasing optimism about the U.S. economy and signaled interest rates would rise at a faster pace than previously projected, as it unanimously approved its second rate increase in a decade in 2016

At the central bank’s last policy meeting of the year on Wednesday, December 14th, officials said they would nudge up the federal-funds target rate by a quarter percentage point, to between 0.50% and 0.75%. Fed officials pointed to a strengthening labor market nearing full employment and inflation moving more rapidly toward targeted levels.

Gold snapped a three-year losing streak with prices rising 8.5% in 2016, but most of those gains came earlier in the year. Gold prices soared 16.5% in the first quarter – their largest quarterly gain in three decades. While the president-elect’s victory came as a surprise, his plan to stimulate the economy and ease business regulation sparked a retreat in gold, as prices fell 15.7% from their July peak at $1,364.90 a troy ounce, to end the year at $1,150.00.

The Shanghai Composite halted trade early on January 4th after the Index fell 7% in a matter of hours. By the end of January, the Index was down roughly 25%. Although it rallied 16% off it its lows, it still ended the year down 5.8%. Many analysts blame market regulators and a weak yuan. The latter has encouraged investors to seek safe havens overseas. Indeed, capital flight was one of the characteristics of 2016 for the Chinese economy.

Commodity markets went on a roller coaster ride throughout 2016. The year began on a disappointing note with crude oil prices plummeting to multi-year lows of close to $25 per barrel. This was due to the consistent demand and supply mismatch of crude oil markets worldwide. With the softness in the oil markets creating pressure on the finances of the Middle East countries, the Organization of Petroleum Exporting Countries (OPEC) decided to hold an unplanned meeting in September to revisit their stance on their rising oil production. The cartel announced plans to put a ceiling of their cumulative production to reverse the decline in oil prices. Final terms reduced cumulative production by 1.2M barrels a day over the coming month. This solution eased investors and crude oil ended 2016 at $54.83 a barrel, almost 100% price increase off of its January lows.

Brazil, Peru, and Russia were outsized winner among emerging markets in 2016, and Greece, Turkey, Mexico, and the Philippines were among the losers. Despite fear of a China slowdown, fear of Fed interest rate increases, fear of the ramifications of Brexit, and fear that president-elect Donald Trump’s foreign policies will hinder progress in global trade, the MSCI Emerging Markets produced a total return of roughly 8% for 2016.

The Dollar Index ended 3.6% higher in 2016, its fourth straight year of gains, on expectations that the Federal Reserve would raise interest rates at a more rapid clip than had previously been expected. "The dollar rally is being driven by enormous investor expectations that the relatively strong U.S. economy will accelerate even further under the leadership of [President-elect] Donald Trump who is expected to stoke growth through fiscal stimulus and deregulation," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

June’s vote to leave the EU sent the British Pound plunging. In July, the pound was briefly the worst performing currency in the world. It dropped even further in October, crashing to a 31-year low of $1.22. The British Pound ended 2016 down 17% against the dollar.

The Mexican peso was hammered by Donald Trump's presidential campaign and election victory. Trump's anti-trade and anti-immigrant rhetoric helped push the currency 17% lower against the dollar in 2016.

In conclusion, 2016 brought it fair shares of surprises - from victories for Brexit and Donald Trump to our recent stock market rally and beyond. However, the year ended with domestic indexes up and a number of positive economic indicators for 2017. If you would like to discuss the outcome of 2016 or what 2017 may have in store, please do not hesitate to reach out.














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