Historically, the first February under a new President has been a poor one for stocks. Not so this year, as post-election momentum propelled markets to fresh highs. The S&P 500, Dow Jones Industrial, and NASDAQ were up 3.97%, 5.17%, and 3.91%, respectively, for the month. Emerging market equities have been a top performer so far, up 3.06% in February and 8.70% already on the year. Bond investments had a rough end to 2016, as quickly rising interest rates led to selling of fixed rate investments. These securities have rebounded through the first two months of 2017, though, with municipal bonds up 1.45%, and high yield bonds rising 2.93%. On the docket for March is a Federal Reserve meeting in which markets forecast a better than 50% chance of another rate increase.
Stock markets started off on the right foot in 2017, with most major markets registering solid performance in January. The S&P 500 increased 1.90 percent, and strong technology stocks propelled the NASDAQ to a 4.35 percent gain. International markets were generally laggards in 2016, but that trend reversed this past month. The MSCI EAFE and MSCI Emerging Markets rose 2.90 percent and 5.47 percent, respectively. In fixed income markets, high yield bonds were the place to be, as they have returned 1.45 percent already this year. There were no changes to monetary policy after the most recent Federal Reserve meeting, so investors will sharpen their focus on potential governmental policy changes as the new administration settles in.
Despite an unfavorable start to the year, stock markets finished 2016 on a high note. The post-election stock rally continued through December, bringing the yearly return of the S&P 500 to 11.96 percent, up substantially from its low point in early February. Small cap equities fared even better, with an impressive 26.56 percent increase. International markets weren’t as robust as domestic ones, but the international and emerging markets gained 1 percent and 11.19 percent, respectively, for the year. Rising interest rates in December depressed fixed income returns, but will provide higher income going forward. In 2017, policies from both the government and the Federal Reserve are set to change course, which investors will need to monitor closely going forward.
Whether it was an exhilarating, come-from-behind win in extra innings that gave the Chicago Cubs their first World Series in over a century, or Donald Trump winning the Presidential election a week later, November proved full of surprises. The thrill of victory was only matched by the heartbreak of others. But regardless of who you rooted and voted for, stock market investors should be happy with the month’s result. The S&P 500 and Dow Jones were up 3.70 percent and 5.88 percent respectively, and both hit all-time highs. Small cap stocks fared even better, with the Russell 2000 increasing a whopping 11.15 percent. Bond yields did rise quickly, leading to short-term losses for fixed income holders. However, higher interest rates will mean greater income going forward.
It was a relatively weak month for equities in October, as investors pared back risk in their portfolios in preperation for the U.S. Presidential elections next month. The S&P 500 was down 1.82 percent, and the small cap Russell 2000 lost 4.75 percent. Despite the poor performance, the early read on corporate earnings looks positive, with a majority of companies beating expectations. Emerging markets did net a small gain, up 0.24 percent for the month.
QUARTERLY MARKET COMMENTARY : Fourth Quarter 2016
The best investment of the past year was not found in traditional financial markets – stocks, bonds, and the like – but rather in betting on English soccer, where a lucky few wagered on perennial laggard Leicester City to win the Premiere League title. The squad went on an improbable run, overcoming 5,000 to 1 odds to claim the championship. Here in the U.S., the Chicago Cubs won the World Series, ending a drought that had lasted over a century. Of course, gambling on sports is not recommended as part of an effective long-term investment strategy, but expecting that unexpected proved a salient theme in 2016. Over in the U.K., citizens voted to leave the European Union, despite what the majority of expert polling data would have led one to believe. Similarly, in the U.S., longshot Presidential candidate Donald Trump went on to win the election with Republicans gaining majorities in the House and Senate as well, defying most conventional prediction models.
There wasn’t much movement in equity markets during September, as investor sentiment remained subdued in the face of potential Federal Reserve action later this year and a looming U.S. election in November. However, the 3rd quarter proved to be a good one for stocks overall. Standouts included the Russell 2000 index of small cap stocks, which gained 9.05 percent, emerging markets, which were up 9.03 percent, and technology companies, which propelled the NASDAQ to a 10.02 percent increase. Interest rates moved up marginally during the quarter, but corporate bonds still managed solidly positive returns.
After a flurry of volatility in June and July surrounding the “Brexit” vote, August turned out to be a relatively quiet month for stock markets. Large cap developed country equities were little changed, with S&P 500 up 0.14% and the MSCI EAFE index of international stocks gaining just 0.7%. Emerging markets, however, continued their strong run, rising 2.49%. Though they experienced a rocky start to the year, high yield corporate bonds have been one of the top performing asset classes, returning 14.35% through the end of August.
Though the U.K.’s decision to leave the European Union was a significant political and economic event, global stocks markets were unfazed by it, as July proved one of the best months of 2016. The S&P 500 gained 3.69%, while the Nasdaq, which is composed primarily of technology and health care companies, increased an impressive 6.65%. International stocks fared well too, with the MSCI EAFE up 5.07% for the month, bringing its year-to-date return into positive territory. It is still too soon to make any predictions regarding the many potential outcomes of the “Brexit” vote, but in the near term, we expect the Bank of England will ease monetary policy in response.
As if the domestic political environment was not tumultuous enough, the U.K. added to the uncertainty in June when they unexpectedly voted to leave the European Union. Global stock markets sold off in the immediate aftermath, but the drawndown was rather short-lived. While the MSCI EAFE index of international stocks was down 3.36% for the month, the S&P 500 actually eked out a 0.26% gain, and is up a respectable 3.84% through the first half of the year. Surprising perhaps has been the performance of emerging markets, which rose 4% in June and more than 6% for the year. Bond yields have been moving toward all-time lows though, reflecting a tentative economic and political backdrop.