A Year of Two Halves
To say 2016 was eventful in the financial world is an understatement. While the first half of the year saw an extremely volatile market with declines across the board, the second half of the year has seen major U.S equity markets rally, however international equities and bonds did not participate, and in fact we saw some downside pressure for both. Our team has taken time to analyze market performance in 2016, as well as deciphered some trends that may influence the markets this year.
Global Impacts
The first half of 2016 began with the stock market’s worst two-week start in history. Most investors had concerns about China’s economic performance and currency valuation, leading to most major indexes losing nearly 10% of their value. Oil also plummeted to under $30 per barrel at the beginning of the year, creating additional market volatility and sending energy prices downward.
In June, the United Kingdom voted to leave the European Union, and “Brexit” overtook the media headlines and led to another extremely volatile period for the markets. While initially the U.S. markets crashed, investor concerns were mostly appeased through lower bond yields and a stable global economic outlook. The long-term impact of Brexit on trade in the EU and on the UK’s financial industry remains to be seen.
The third and fourth quarters of 2016 showed China’s economic growth and outlook had steadied which provided stability to the global economic outlook. While Europe’s growth is stagnant, the lack of decline in light of Brexit leaves investors hopeful.
Domestic Activity
During the second half of the year, the financial headlines that focused on the United States increased, especially with the media-dubbed “surprise” election of Donald Trump to the U.S. Presidency. While markets initially tumbled, they rallied through the end of the year as investors anticipate tax reform, deregulation, and increased spending under his leadership.
In light of the steadied market performance, higher home prices, low unemployment and improved confidence in the economy, the Federal Reserve decided to raise interest rates by 25 basis points in its December meeting. The Fed anticipates it will raise rates again in 2017, possibly even three times. It remains to be seen how this will impact inflation trends and international trade.
What Does This Mean for You?
This message provides only a small peek at the large influencers on the markets in 2016, but hopefully illustrates the extraordinary volatility in our world today. At McCabe & Associates, we believe we cannot predict the market, or the things that will influence it, but we can help prepare you to weather the storms. The need for diversification in your portfolio will remain critical as we anticipate continued volatility moving forward.
While most diversified portfolios did not compete with the U.S. Equity Markets, Small Cap, and Emerging Market returns, history tells us that trying to predict market activity is not the wisest decision. For instance, investors who lost patience with international stocks after disappointing returns in 2010 and 2011 and decided to invest elsewhere lost out on the reward of returns that arrived in 2012 and 2013. We encourage you to remain steadfast and focused on the long-term, not the day-to-day, month-to-month, or even year-to-year market movement.
Looking Forward
We expect 2017 will bring its challenges. With a new president will likely come new government policies and the possible repeal or replacement of current policies. We don’t know what we can expect for job creation, unemployment rates, the global economy, and currency valuation. Interest rates, inflation, and trade are all up in the air. What we do know is that time in the market (not timing the market) in a diversified portfolio has proven to be a valuable strategy throughout market history.
Our job is to help you understand the risks involved with investing, do our best to help hedge you against those risks using sound investment strategies, and keep you focused on your long-term goals, even when the markets are unpredictable.
If you have any questions or would like to discuss anything with us, please feel free to give us a call.
Opinions expressed are not intended as investment advice. Past performance is not indicative of future results.