You know you are deep into a longstanding bull market when “Dow 20,000” is a regular story on the evening news. (Read why the Dow is a terrible benchmark index for U.S. stocks.) Who would have imagined record market highs when 2016 got off to such a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930?
The markets eventually bottomed in mid-February and began a long, slow recovery. Markets turning positive by the end of March but suffered a sharp but short setback when the U.K. decided to leave the Eurozone in June. Markets were sharply positive for July forward until enduring a pull back leading up to the elections, after which they resumed a strong climb.
The S&P 500 index finished up a respectable 11.96% in 2016. However, this was a year to remember for investors in small company and value-oriented stocks – both science-based factors that historically have added to investment returns.
- The Russell 1000 Large Cap Value index returned 17.34%.
- Russell 1000 Large Cap Growth index 7.08%.
- Large Value – Large Growth = 10.26% Large Value outperformance
- The Russell 2000 Small Cap index returned 21.31%.
- Small – Large = 3.94% Small Cap outperformance
- The Russell 2000 Small Cap Value index returned 31.74%.
- Russell 2000 Small Cap Growth index 11.32%.
- Small Value – Small Growth = 20.42% Small Value outperformance
International investments contributed mixed results to a diversified portfolio’s returns. The broad-based EAFE index (EAFE = Europe, Australasia and Far East) of companies in developed foreign economies posted a paltry 1% return in U.S. dollar terms. Yet, emerging markets stocks of less developed countries, as represented by the EAFE EM index, gained 11.19% for the year. Small and value portfolio tilts added value here as well. For example, the MSCI Emerging Market Valued Index returned 14.9%.
BONDS & ALTERNATIVE INVESTMENTS
In the bond markets, it is possible that the decades-long bond bull market (since the 1980s) has ended, which means declining interest rates no more. The fixed-income world is experiencing rate rises. The U.S. 10-year rate fell dramatically following BREXIT (June 2016) to record lows at ~1.3% and a few months later quickly increased and doubling to ~2.6%.
So any yield-based investment – bonds, real estate, and utility stocks for examples -- shined in the first half of the year and gave back in the second half. Recall: inverse relationship between increasing rates and prices of existing yield-based assets; think teeter-totter.
For commodities, in 2015 investors were wondering why they owned commodities in their portfolios, when the S&P GSCI index delivered a whopping 32.86% loss. In 2016, they may be wondering why they were not more committed to the asset class, as the index gained 27.77%. This was fueled largely by a 45.03% rise in the S&P crude oil index. Gold prices shot up 8.63% for the year and silver gained 15.84%.
As always, there were many unpredictable anomalies in the investment world. Anyone lucky enough to have speculated on the Brazilian Bovespa index—comparable to the U.S. S&P 500—would have reaped a gain of 68.9% this year despite all the headline drama around the Zika virus and political turmoil. Russian stocks were up 51% for the year despite Russia being Russia, Putin being Putin, recent sanctions from the U.S. government, and lingering international sanctions related to the invasion of the Crimean peninsula.
What is going to happen in 2017? Short-term market traders seem to be expecting a robust economic stimulus combined with lower taxes and deregulatory policies that would boost the short-term profits of American corporations. However, it is helpful to remember that:
- We are entering the ninth year of economic expansion--the fourth longest since 1900.
- Over the expansion since 2009 stock prices have risen dramatically. They are arguably expensive (but have been for some time).
- We have seen six consecutive quarters of negative earnings growth through much of 2015 and 2016 before turning slightly positive in the second half of 2016.
- If U.S. markets are going to continue to do well and justify their higher prices, we need even more earnings growth. It is difficult to see where else within the equity return building blocks strongly positive returns will come from.
It is clear that the new President-elect wants to accelerate America’s economic growth, but actual policy is very different from election cycle rhetoric. At the same time, there are many unknowns around the globe (and there always will be).
With the January downturn and so much uncertainty at this time last year, nobody could have predicted double-digit returns on U.S. stocks at year-end. Next year could bring more of the same or not. In either case, “Dow 20,000” is essentially meaningless.
What investors should have learned over the past few years is that the markets have a way of surprising us. Trying to time the market and get out in anticipation of a downturn is a loser’s game. The history of the markets has been a general upward trend that benefits long-term investors. Looking out over the long-term and planning for a few hard bumps along the way is probably the best outcome to expect. Constructing your financial life plan to deal with both of these – long-term growth and short-term bumps – is necessary.
Focus on what you can control and ignore the rest.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from Bob Veres.
Wilshire index data: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Aggregate corporate bond rates:
Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/