Happy New Year!
We hope you all had a wonderful Holiday Season! It’s hard to believe it’s already 2017. NOW is the time to either complete or update your personal long term financial plan. If you are not taking advantage of our MyWealth system, you are missing out on a great personal financial management and planning system. Our goal this year is to get each and every one of you set up on this program, assist you in coordinating all your financial affairs, and either update or help you prepare your personal long term financial plan. Call us today to set up your personal review time and to get your started or update your current plan. We can meet in person or by phone.
2016 turned out to be somewhat of an average year for stocks if you use the large-company S&P 500 Index as your yardstick. Going back to 1928, the average annual return, including reinvested dividends, runs nearly 10% (NY Stern School of Business data). When the year had ended, the S&P 500 rose 9.54%, not including dividends. The index gained 3.25% in fourth quarter.
The Bloomberg/Barclays Aggregate Bond Composite produced just 2.69% total return last year due to the rise in interest rates during the fourth quarter. (Black Diamond Reporting) Mortgage rates ended the year at an average of 4.16% for a 30 year fixed and 3.32% for a 15 year fixed rate mortgage. (Bankrate.com)
Oil prices finished 2016 on an up note with the price per barrel of West Texas Intermediate Crude Oil ending the year at $53.89. This compares with $37.07 per barrel at the beginning of the year. (CNBC)
We are very pleased with the net results for our client portfolios across all risk levels in 2016. We made some adjustments to our overall stock models in January, which proved to help improve our equity/stock performance during the balance of the year. We also moved our fixed income/bond assets to funds that hold short-term maturity bonds in late summer. This helped provide stability in our fixed income holdings for clients during the recent rise in interest rates in the fourth quarter. We continue to be optimistic moving into the New Year in general and will monitor the markets and economy on a regular basis. We will keep you advised.
A look back at 2016:
The year finished on a solid note, but 2016 didn’t start out that way.
Falling oil prices, worries about China, an upward lurch in junk bond yields, and overblown fears of a recession took a big toll on investor sentiment. CNNMoney pointed out that the first ten days of the year were the worst start for the Dow in its history – that’s going all the way back to 1897.
To compound the angst, comparisons to 2008 were common. However, this wasn’t 2008, there wasn’t a subprime crisis that was brewing, and the stock indices touched bottom in mid-February (St. Louis Federal Reserve).
At the time, stocks were closely tracking oil prices. When oil prices bottomed, so did the S&P 500 Index (St. Louis Federal Reserve, Energy Information Admin.). Not coincidentally, so did the peak in junk bond yields (St. Louis Federal Reserve, Energy Information Admin.). While tumbling oil prices had raised worries over demand and led to fears a recession might take hold, the reality was quite different – it was about too much oil, not fading demand in the economy.
Stocks eventually moved off lows, and the closely-watched S&P 500 Index eclipsed its May 2015 high in July, when the surprise Brexit vote in the U.K. at the end of June failed to create much turbulence in Europe.
Unexpected Surge in Stocks after the Election:
New highs experienced by the major U.S. indexes came despite the unexpected victory by Donald Trump. Most analysts believed a brief but violent selloff would ensue if the outsider won the election. Instead, talk of corporate and individual tax cuts, new spending on infrastructure, the repeal of Obamacare, and regulatory reform all served to spark a late-year rally.
The late-year surge in stocks came at the expense of longer-term Treasury bonds and high grade corporate bonds (St. Louis Federal Reserve). Figure 1 highlights the spike in Treasury yields (bond prices and yields move in opposite directions).
Yields have been at or near historically low levels for much of the economic recovery. Very accommodative monetary policies from the major global central banks, low rates of inflation around the globe, a lackluster economy, and yields hovering near or below zero in parts of Europe have all played a role. Still, on a historical basis, Figure 1 illustrates that yields remain low.
The long cycles in Oil:
Oil is an incredibly important component in our economy. Falling gas prices have been a boon for drivers, but severe cutbacks by oil-related firms have forced layoffs and sharp reductions in expenditures in the industry. Moreover, it has hampered S&P 500 profit growth (Thomson Reuters). We are witnessing a modest bounce in prices thanks to a recent OPEC decision to cut production. But even at today’s prices, rig activity in the shale producing regions is rising, promising to bring new output.
We won’t venture a guess where prices will end up next year, but as Figure 2 highlights, oil has historically moved in very long cycles. If that holds true this time around, we could see prices remain at relatively low levels for quite some time.
What’s in store this Year
As with oil prices, forecasting how stocks will perform this year is dicey. Simply put, there are too many moving parts to the stock price equation, and each of those moving parts can affect one of the other moving parts. But we can take a look at some of the tailwinds and risks.
Since WWII, the U.S. economy has had 11 economic expansions, which were interrupted by recessions (National Bureau of Economic Research). At 73 months, the current expansion is the fourth longest, with the longest being 120 months in the 1990s (NBER).
The current recovery isn’t young anymore, but risks for a near-term recession in the U.S. are low. That’s important for investors because most bear markets (defined as a 20% decline for stocks) since the late 1950s were associated with a recession. The one most recent exception – the one day Crash of 1987.
Thomson Reuters is forecasting a return to S&P 500 profit growth in 2017, which would provide a tailwind for stocks. A gradual upward path in interest rates by the Fed would probably be viewed as a plus, especially if it were in response to an expanding economy.
Trump’s election sparked enthusiasm on Wall Street primarily because he has touted pro-growth policies and downplayed his more controversial ideas. For example, it’s unknown if his tough trade talk during the election will result in dramatic new barriers to free trade or whether his rhetoric is simply a negotiating ploy. The vast majority of economists would argue that free trade is a net benefit to the U.S. However, “net benefit” is a fancy way of saying that winners exceed losers, but there are still losers.
Many of us stand to gain when we buy cheap imports like big screen TVs that would cost more to manufacture in the U.S. Exporters gain access to foreign markets. Since 1990, exports as a percent of Gross Domestic Product have risen from 6% to 13% (U.S. BEA). That creates jobs for Americans and profits for U.S. firms.
But jobs have been lost when firms relocate plants abroad or when U.S. manufacturers can’t compete against lower-cost imports. If Trump were to follow through with threats to raise tariffs, U.S. trading partners could quickly retaliate, sparking trade war. Any heightened uncertainty could create volatility for stocks.
There are also other unknowns. Will simmering problems in Europe or China bubble to the surface, or will unexpected geopolitical issues surprise investors?
What we have seen during this cycle – problems abroad that have not had a material impact on the U.S. economy have created temporary angst but have not been enough to stop the current positive trend for the markets. Another way to view this – those who have adhered to a long-range view and side-stepped the inevitable gyrations have profited.
We appreciate the privilege to serve each of you and are so thankful for the trust and confidence you have placed in us over the past years and look forward to working together in the years to come.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.