Welcome to our first newsletter of 2017. We hope our note finds you and your family doing well and staying safe after Portland recorded its biggest snowstorm in nearly 20 years, and its fifth largest snowfall in any twenty-four-hour period. We are more than ready for the snow and freezing rain to make way for our customarily mild winter fare.
Looking back at stock market performance in 2016, it certainly seems as though the market should have carried a warning sign: “Beware of steep drops and sudden acceleration.” We started the year with falling oil prices that fueled Wall Street’s worst-ever start to a year, experienced the unexpected in Brexit, and ended the year with the election of Donald Trump. This past year in stocks was nothing short of turbulent. Yet in spite of the volatility, in the end all three major indexes—the Dow Jones Industrial Average, S&P 500 and Nasdaq—notched healthy gains in 2016.
2016 will also be remembered as a year in which many expectations were overturned, from Britain’s decision to leave the European Union to the U.S. election results. But the forecasts about what would happen in the financial markets if these events were to occur proved to be a nearly perfect inverse of the actual reactions—rather than collapsing, equity prices sprinted higher.
Prior to the November elections, overall U.S. economic data began to improve and corporate earnings began experiencing a long-awaited comeback. These factors led to increases in stock prices, bond yields, and the value of the U.S. dollar. These trends accelerated sharply following the election, as investors anticipated that Donald Trump and a GOP-controlled Congress would be aggressive about enacting pro-growth economic policies. The Dow Jones Industrial Average and the S&P 500 Index each added more in the fourth quarter than they had gained during the first three quarters of the year. While political optimism has been a factor, we think global economic strength was more of a driving force. The global economy had positive momentum heading into the election, and many indicators since then have shown further gains.
In early 2016, investors were fixated on the risks of recession and deflation. Now, many anticipate we may be at the forefront of a new economic boom. However, neither extreme appears justified—and any movement from one side of the pendulum to the other will take time.
The future is always uncertain, but now more than any recent period, there seem to be numerous possibilities as to what could occur. While we may have a strong feeling of what tomorrow will bring, unforeseeable events often alter reality, as we saw in 2016. As equity markets have hit new all-time highs, fixed income assets have underperformed. But this negative correlation between asset classes is actually a benefit to investors. While we expect the volatility of fixed income assets to increase going forward, it’s important to remember that overall, bonds are a far more stable asset class than equities. They play an integral part in the portfolio by providing diversification, reducing volatility, and supplying liquidity and income. And when we next see equity weakness, it is likely that fixed income will balance that out and provide the best performance in the portfolio. When used as part of diversified investment strategy, bonds help smooth out a portfolio’s overall performance in the long term.
As we look ahead to 2017, we maintain a nominal growth investment stance. We expect pro-growth legislation to be passed, even if it takes longer and winds up being less comprehensive than many hope. More importantly, we think the economic and earnings backdrop remain positive for stocks. The Federal Reserve will likely continue to raise interest rates this year, but at a pace that keeps overall policy accommodative, and global monetary policy also continues to be extremely supportive.
We expect US equity markets to be a top performing asset class, and that international markets will continue to remain attractive given their relative value and positioning in the business cycle. Our main focus continues to be diversification of risk and investing for the long term.
Your future is of the upmost importance to us at CGC Financial. We look forward to meeting and hearing from you throughout 2017, and take pride in servicing your financial needs.