Investment Year in Review 2016

When the dust settled, 2016 was a good year for many asset classes. Stocks around the globe appreciated, led by double digit returns in the U.S. and the emerging markets. Non-traditional assets appreciated across the board, led by double digit returns in commodities and infrastructure. Municipal bond investors, however, did not fare so well and actually lost money for the year.

The year in pieces.

While the year ended well for most investors, the ride was a bit bumpy at times. In fact, 2016 was characterized by six distinct time periods, each with their own set of emotions: an early sell-off characterized by fear and anxiety as stocks tumbled, a recovery surrounded by relief and optimism as oil prices rebounded and risky assets soared, panic and disbelief during a two day BREXIT sell-off, acceptance and complacency during a post BREXIT recovery, nervousness in the pre-election fourth quarter, and finally optimism and hope in the post-election rally.

Interest rates and bond pricing.

During the first half of 2016, additional central bank easing and the uncertainty that surrounded the U.K. BREXIT vote led interest rates to fall. The second half of the year was quite different. The lack of additional monetary stimulus efforts and the unexpected election of Donald Trump led both interest rates and inflation expectations to rise. With nothing to combat the rise in interest rates, bond investors lost money in the fourth quarter. Add in the expectation that the Trump administration will lower taxes, and the loss was compounded for municipal bonds. In fact, the nearly 4% fourth quarter loss for municipal bonds was so bad that it brought the asset class negative for the entire year.

Major asset class returns.

President Trump’s 100-day action plan.

On January 20, Donald Trump will be sworn in as the 45th president of the United States. It is widely believed a president’s accomplishments, or lack thereof, during the first 100 days serve as an indicator of things to come during the next four years. As such, conservatives and liberals, domestic citizens and foreign leaders, business executives and employees, investors and speculators, will all be watching with a mix of interest and anxiety. In his contract with the American Voter, the president elect outlined a bold agenda for his first 100 days. How much of it will be accomplished, as well as what effect it will have on the economy and financial markets is yet to be determined.

U.S. dollar – a blessing and a curse for investors.

The U.S. dollar has appreciated approximately 40% over the past few years. For U.S. investors with assets abroad, this put a big dent in their investment returns. Unfortunately, this is not uncommon. The U.S. dollar has gone through several up and down phases since the end of the gold standard in 1971, sometimes to an investor’s benefit and sometimes to their detriment. With a new president entering office and central banks contemplating the future of monetary policy, investors will be watching the dollar closely in the months to come.

Stock valuations.

Domestic stocks have appreciated significantly over the past several years, which has led some to question their current valuations. With prices rising much faster than earnings, domestic stocks do indeed look a bit stretched when compared to historic measures. In contrast, foreign stock valuations are more attractive and may prove to be rewarding for patient investors over the next several years.

Economic growth.

Since 1945, we have had several expansions and contractions in the U.S., averaging 58 and 11 months respectively. While many are quick to point out that the current expansion at 90 months is well above average, they fail to mention that the current expansion is very different from many in the past. Typically, real growth during expansionary periods averages in the 3% to 4% range, however growth during the current expansion has been below 2.5%. Perhaps an economy that is growing at a slower pace can grow for a longer period of time before contracting?