I hope that your 2017 is off to a wonderful start! It has certainly been an interesting January here in Bend with record amounts of snow, schools closed for 9 days in a row, clogged roads, flooding and collapsing roofs. The bright side has been the best skiing in decades. The bright side for the markets is that the Dow Jones Industrial Average (DJIA) broke through the 20,000 barrier for the first time in history on January 25.
I always like to look forward however I think it’s beneficial to look back over the past year’s highlights and summarize some of the major events and we all know, 2016 saw some big events! These had dramatic impacts on financial markets as well as investor emotions.
2016 was a very good year for diversified portfolios, I have always shared my passion for a disciplined investment approach, which emphasizes diversification across and within asset classes along with rebalancing. In 2016 this strategy paid off again as portfolios steadily gained value the year.
The fourth quarter got off to a slow start and then a bombshell struck the markets, as Hillary Clinton’s widely-expected presidential victory was instead a win for Donald Trump. Likewise, control of the U.S. Senate was expected to go to the Democrats, but final results showed the Republicans maintained a small majority and also suffered only limited losses in the House. The election results created expectations for shifts in federal policies, which ignited a strong rally in stocks and intensified the weakening in the bond market.
Here are some additional interesting facts regarding markets over the past year.
64 percent of the S&P 500 gains for 2016 came from election day through year end, increasing 7.7 percent over this brief time.
Every asset class was in positive territory for 2016.
Natural resources was the top performer up over 30 percent after being the worst performer over the previous two years.
U.S. stocks have outperformed all other asset classes over the past five years.
The strength of U.S. stocks in Q4 vaulted them to a substantial outperformance vs. stocks from developed international countries.
In the case of equities, the smaller the better, the S&P 500 returned a solid +12.0 percent, but MidCap was better at +20.7 percent and SmallCap was better yet at +26.6 percent.
The EAFE, International index was far behind at +1.0 percent, although Emerging Markets who have been lagging over the past five years turned the corner in 2016 with an 11 percent return.
Interest rates hit a low of 1.6 percent on 9/30/16 and a high of 2.6 percent on 12/15/16 and yet were up only .18 percent since 1/1/16.
Domestic REITS lagged U.S. equities, but did better than bonds at +6.4 percent.
Let’s focus on a few questions that may prove important in 2017:
Will current trends such as rising equity markets and rising interest rates continue?
Will global economic growth rates recover?
Will market volatility increase?
Will current trends continue?
Whether your pleased with the outcome of the U.S. election results or not, they clearly impacted financial markets, as stocks, bond yields as well as the Dollar all moved higher based on expectations of stronger growth in the economy and corporate profits. The DJIA hit 20,000! Have the entire four years of Trump been fully priced into financial markets just a few months after the election? We will have to wait and see.
Here’s some interesting history: When Barack Obama was elected in 2008, the DJIA dropped 929 points (nearly 10 percent) in the first two days after the election. That was the worst two-day drop since the October 1987 Crash! However, things quickly reversed to a very solid bullish trend as the DJIA gained over 90 percent from Election Day 2008 to Election Day 2016.
One important task for investors in 2017 will be to determine if these shorter-term moves will develop into trends with staying power. If these are indeed trends, diversification within domestic assets may prove more valuable than global diversification in the short term. The longer-term impacts are, as always, unforecastable.
Can we expect a revival of solid global economic growth rates?
Although U.S. GDP ramped up to +3.5 percent in Q3, there is not yet a lot of evidence that US growth is reviving from its post-Great Recession trend of +2 percent growth. The biggest improvement in US data has been in confidence surveys. While rising “animal spirits” may induce businesses and consumers to spend and invest, they will fade away if Washington fails to implement improved regulatory, taxation and spending plans. Investors are also counting on the Fed failing to enact a serious tightening binge. We plan to take a “wait and see” attitude on U.S. economic growth.
The international landscape is at least equally dicey, as there is noticeable headline risk in Europe. The Netherlands, France and Germany have national elections this year. If the elections prove benign, markets will still have to digest the Italian banking situation and furthering progress for Britain’s exit from the EU.
Growth in emerging economies slowed significantly over the past few years. While rising commodity prices helped Emerging Markets to recover in 2016, there continues to be several factors which will decide if emerging markets can return to their former growth glory in 2017 and beyond.
Will financial market volatility increase?
I expect volatility will increase in 2017. There may not be anything as dramatic as the 15 percent stock market plunge we experienced early last year, or the 100 basis point bond yield surge from late last year. However, terrorism, politics, higher valuations, investor complacency and an unfriendly Federal Reserve combine to suggest investor sentiment swings may be sizeable enough to cause market volatility. The Bull Market in bonds is now 35 years old, the last US recession ended six years ago, housing prices have returned to former high levels in most areas─ certainly in Central Oregon, and that U.S. stocks have not experienced a 20 percent correction in over five years. Old age won’t cause any of these markets to reverse, but volatility may increase if investors determine they need to protect capital gains that have built up.
The strategy for managing globally diversified portfolios is focused on optimizing risk adjusted returns. I recognize the global economy is growing at a below average rate, but see few signs that a U.S. recession is in the offing. Domestic equities are trending higher and international valuations are attractive. While it appears that interest rates may rise this year, the absence of inflation and the presence of high demand for fixed income (bonds) should moderate any increase that develops.
I believe that your chance for success over the long term is most favorable when you diversify among all of the major asset classes, rebalance your portfolio throughout the year and understand that it’s all about time in the markets and not timing the markets. I hope your 2017 is off to a wonderful start. Think snow on the mountains and bare pavement in town!
David Rosell is President of Rosell Wealth Management in Bend. www.RosellWealthManagement.com. He is the author of Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement. Learn more about his book at www.DavidRosell.com or Amazon.com. Ask for David’s book at Barnes & Noble, Newport Market, Cafe Sintra, Bluebird Coffee Shop, Dudley’s Bookshop , Roundabout Books and Sunriver Resort.
Investment advisory services offered through ValMark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through ValMark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. (800) 765-5201. Rosell Wealth Management is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.
