Don’t Believe the News
We may look back at 2016 as the year in which Russia and fake news helped elect an American president. In the financial markets, it was a year of misleading news as well. The facts were right, that’s true, but most financial analysts got the forecast wrong.
At first, the precipitous 8% drop in the S&P 500 in the first ten days of January seemed to prove the pundits were correct—the markets were caving. The Dow Jones clocked an even higher 8.25% loss, the greatest in its 120-year history.
Then the news got worse. Oil prices sank, major international markets dropped 20% below their peaks (a classic signal of a bear market), and bank stocks hemorrhaged 23% between January 1 and February 11. USA Today captured the mood nicely: “emotions and fear [are] taking on a bigger role in the rout” while investors are “questioning the ability of the world’s central bankers to calm the market’s frayed nerves.” Ah yes, the central bankers, a favorite scapegoat.
This is where we pause the story to remind investors: acting on financial news can lead to strange and unsettling places. One may sell at the low point, or close to it, but then lose sleep over when to buy back in. Those lucky high-point sellers have a similar problem as they search for the bottom.
2016 once again demonstrated why it’s best not to sell on news at all. By mid-February, less than six weeks after the carnage began, the direction of the markets shifted. There was still plenty to fret about in the US and global economy. The financial press continued its hand-wringing and several big-name hedge fund managers continued to recommend selling. But the worst was over. The US stock market began improving, albeit slowly.
By year-end the major market indices were uniformly up. The US stock market produced a decent 12.74% return and emerging markets returned 11.19%. Bonds yielded 2.65%.
Did you notice it’s January again? So many predictions! Anything can happen, and much will. Our advice: be aware of fake news, misguided direction, and financial recommendations that encourage you to buy or sell now. Stay focused on long-term portfolio performance. Periodically review your financial goals (has anything changed that might affect your strategy?), remain appropriately diversified, and keep your portfolio out of the news cycle.
Q4 2016 Market Review
World Asset Classes: Looking at broad market indices, the US equity market outperformed both developed ex-US markets and emerging markets in Q4 2016. The value effect was positive in the US, ex-US and emerging markets. Small caps outperformed large caps in the US but underperformed in both ex-US developed markets and emerging markets. For the quarter, the Russell 2000 Value Index was the top performer at 14.07%, and the S&P ex-US global REIT was the laggard at -8.36%.
US Stocks: The broad US market as measured by the Russell 3000 index recorded a gain of 4.21% for the quarter and 12.74% for the year. Small caps outperformed large caps for the quarter, 8.63% versus 3.83%. Value indices raced ahead of growth indices in all size ranges. Small cap value was the best US equity class performer for both the quarter (14.07%) and the year (31.74%).
International Developed Stocks: In US dollar terms, ex-US developed markets returned -0.36% for the quarter and 2.75% for the year, underperforming the broad US equity market. Large caps outperformed small caps for the quarter (-0.36% versus -2.74%), but small caps outperformed large caps for the year (4.32% versus 2.75%). The value effect was positive across all size ranges, returning 4.62% overall for the quarter and 7.39% for the year.
Emerging Markets Stocks: Emerging markets underperformed both the US and ex-us developed markets, returning -4.16 for the quarter and 11.19% for the year. Value outperformed growth across all size categories, returning -1.10% versus -7.12%. Large caps outperformed small caps at -4.16 % and -6.22% respectively.
Select Country Performance: Q4 saw wide swings in returns across both developed and emerging market countries. Italy (8.93%) turned in the best performance in developed markets, with the US second (3.84%). New Zealand turned in the worst developed country performance at -11.09%. In emerging markets, Russia topped the charts for the quarter at 18.88%, followed by Greece at 13.87%. The worst Q4 emerging market performers were Egypt (-22.53%) and Turkey (-13.58%).
Real Estate Investment Trusts: Both US and global REITs lagged their broad market indices for the quarter, returning -2.53% and -8.36% respectively. For the year, however, US Reits returned 6.68% and global Reits returned 3.12%.
Commodities: The Bloomberg Total Return Commodity index gained 2.66% for the quarter, resulting in a one-year gain of 11.77%. Performance was mixed. Livestock turned in a stellar showing with lean hogs (30.30%) and live cattle (14.68%). Natural gas was another high performer with a Q4 gain of 16.83%. The worst-performing category was precious metals, with silver dragging the bottom at -17.31% and gold at -12.80. Brent oil returned 7.43% and crude oil delivered 7.05%.
Fixed Income: Interest rates across the US fixed income markets increased in the fourth quarter. The yield on the 5-year Treasury note increased 79 basis points (bps) to 1.93%. The ten-year T-Note yield rose 85 bps to 2.45%. The 30-year Treasury bond added 74 bps points to finish at 3.06%. The short end of the yield curve saw the largest rate increases in 2016. The 1-year T-bill gained 20 bps over the year to 0.85%, and the 2-year gained 14 bps for the year to 1.20%. Short-term corporate bonds declined -0.18% for the quarter but gained 2.36% for the year. Intermediate-term corporates fell by -1.84% for the quarter but gained 4.04% for the year. Short-term municipal bonds declined -1.07% for the quarter but increased 0.07% for the year. Intermediate-term municipal bonds fell -3.74% for the quarter and -0.45% for the year.