In many ways, 2016 has proven to be predictably unpredictable as highly covered events and predictions have not met up with outcomes (a few examples: Growth concerns in China, Fed uncertainty, Global slowdown fears, and Brexit). Q4 proved to be no different with the surprise election outcome of President-elect Donald Trump, and continued shifts in the political landscape abroad. Optimism about the incoming administration’s plans for fiscal stimulus through reduced taxes and increased infrastructure spending, along with a move toward deregulation in the financial industry, seemed to drive sentiment for Q4. This positive sentiment was the primary driver of outperformance in the financial and industrial sectors, the expectation of nationalistic trade policies weighed on EM Equities, while positive sentiment surrounding U.S. equities drove investors out of Treasury and into U.S. equities, sending the yield on the 10-year Treasury Note to 2.37%.
Some key highlights over the quarter:
· According to the second estimate of economic growth released by the Bureau of Economic Analysis (BEA), third quarter GDP increased at an annual quarter-over-quarter rate of 3.2%.
· As expected, the Federal Open Market Committee announced in December that they raised the federal funds rate by 0.25%. It’s the first increase this year and just the second since June 2006.
· The post-election rally helped bring all major benchmarks to a series of record highs. U.S. stocks rose mostly higher in the quarter, with Goldman Sachs, JPMorgan, and Caterpillar leading blue chip stocks higher.
· While High Yield Bonds stood their ground, US / Global Bonds mainly sold off as U.S. Treasury yields surged and the dollar strengthened in Q4. The 10-year alone increased 53 basis points (to 2.37% at the end of November). This move is a reflection of investors anticipating future fiscal stimulus given less political gridlock, given Republican control of the White House and majorities in both the Senate and House of Representatives.
· Largely driven by yield-proxy investors, Real Estate and Utilities trended lower as retail sentiment drove rotation out of yield-oriented assets and back into fixed income instruments.
· Oil trended higher as OPEC brokered the first global petroleum cut in 15 years. If implemented, inventories will decline 760,000 barrels per day. Markets generally see this decision as a positive for U.S. Shale Drillers as rigs continue to come back on line during the quarter.
While the world appears uncertain, investors were reminded in 2016 that having a broadly diversified portfolio and a long-term approach can help improve return outcomes. Even though bouts of volatility are painful, those moments are often temporary and returns appear to have much longer staying power.