First Bank Wealth Management

The past year was a wild ride for investors with several twists and turns along the way, yet for those who were able to stay the course, the U.S. stock market as defined by the S&P 500 turned in a very healthy 12% return for the year.  This despite starting the year with its worst opening week ever in the history of the stock market with a decline of around 6% after the first five trading days.  The rest of January wasn’t much better and by early February, the S&P 500 had fallen around 10% on concerns over China's slowing economy, falling energy prices and fears of a global economic slowdown.  But as oil prices eventually recovered and fears of a global slowdown faded, the market rebounded strongly over the rest of the year gaining almost 25% from its February lows through the end of the year.

The next major event to worry investors occurred in June when the U.K voted to leave the European Union commonly referred to as “Brexit” shocking the pollsters and investors.  This created mass confusion about the future of European trade, the value of the British pound and Britain's financial institutions. U.S. markets swiftly fell in the days after the vote, but then rallied within a few weeks to a new all-time high.   From the low point after Brexit, the S&P 500 was up around 11% through the end of the year.

And finally, the U.S. had its own election to worry about and despite most of the experts and pollsters predicting a Clinton victory, in fact the odds in the weeks before the election were giving Clinton between a 75% and 90% chance of winning, Donald Trump became our next president as he was able to carry most of the swing states. Then despite many pundits predicting a market decline or even a crash if Trump won, the markets rallied almost 8% after the election through the end of the year.

 

Chart of returns-Major asset classes for 2016

 

Other major U.S. stock indexes also fared well, with the Dow Jones Industrial Average up 16.5% and the Nasdaq up 9.0%, but the big winner in the U.S. market was the Russell 2000 Small Cap Index, which was up 21.3% for the year.

For the year, value stocks did considerably better than growth stocks led by small cap value which was up 31.7% and large cap value, which was up 17.3%.  This compares to a gain of 11.3% for small cap growth and a 7.1% gain for large cap growth. 

Every single sector in the S&P 500 was positive for the year with the exception of health care, which had a 2.7% decline.  The best performing segments were energy up 27.4%, followed by telecom up 23.5% and financials up 22.7%.

Internationally, the results were mixed, but all the major indexes were still positive.  Leading the way was the MSCI Emerging Market Index up 11.3%, followed by the MSCI EAFE Small Cap Index up 2.5% and the MSCI EAFE Developed Market Index up 1.6%.

Late in the year in December, the Federal Reserve decided to raise interest rates by 0.25%, its first rate hike since the previous December.   The Federal Reserve indicated that a rate hike was warranted citing improving home prices, low unemployment and improving confidence in the economy.  The yields on 10-year government bonds ended the year at 2.45%, up over 1% from their lows earlier in the summer, but up only slightly from the 2015 yearend yield of 2.27%.  Though bond returns declined in the last few months of the year as interest rates rose, returns were still positive for the full year. The Barclay’s Aggregate Bond Index was up 2.7% for the year, the S&P National Muni Index was up 0.4% for the year and the Barclay’s High Yield Index was up 17.1% for the year as its returns tend to more correlated to the stock market vs. interest rate movements.

 Chart of returns-Major asset classes for 2016

 

No one knows for sure how the capital markets will do in 2017 or over the next several years.  As a result, investors should not abandon or change their long-term asset allocation strategy.  This should include broad global diversification, which is the best strategy against uncertainty with the right mixture of stocks, bond and some alternatives.  As 2016 proved, there will always be issues to worry about and at times staying invested in stocks will prove emotionally trying, but investors can be rewarded over time by staying disciplined.