On behalf of the Altium Investment Committee;
On the morning of November 8th, following a long night of election coverage, it appeared as though we were going to end the year in the same manner in which it started; with extreme volatility and falling equity markets. However, things turned out differently. Before we discuss our expectations for 2017, let us first take a quick look back at a year that reinforced our belief that favorable long term investment results will be achieved by remaining committed to a diversified and strategically allocated portfolio.
Fed raises rates for first time in nearly a decade in December 2015, expectations were for gradual increases during 2016; Fed does not end up raising rates until its last meeting in December.
S&P 500 gets off to its worst start ever, declining ~ 11% in the first 2.5 weeks of the year. Key contributors are: Global economic concerns, oil price depression, poor U.S. economic data and concerns of a pending recession.
UK votes for “Brexit”; Negative reaction is short-lived and markets recover after brief sell off.
US 10-year Treasury volatility; Yields started the year at 2.24%, reached a record low of 1.37% over the summer and ended the year at 2.45%.
Donald Trump to become the 45th President of the United States. Contrary to Wall Street consensus this sparked a year-end rally in equity markets and subsequent decline in bond prices.
Amongst the major asset classes, U.S. stocks dramatically outperformed international stocks for the year. Meanwhile, fixed income assets, which led in performance most of the year significantly underperformed stocks in the fourth quarter.
Source: YCharts; 2016 major index percentage price change
Source: Bloomberg; S&P 500 2016 price chart highlighting January decline, “Brexit” and “Trump rally.”
Trump’s pro-growth policy rhetoric coupled with his proposed fiscal stimulus programs (i.e. Infrastructure build) have contributed to the recent rise in stocks.
All eyes on Fed. Three rate hikes are built into current expectations, yet uncertainty remains in the timing and size of the increases.
Jan 20th inauguration. Will the old saying, “buy the rumor, sell the news” come to fruition? Meaning, will the rally sparked by the election results reverse when Trump takes office and focus shifts to actual policy implementation not speculation via 140 character “Tweets?”.
Key Indicators will be U.S. dollar, interest rates and inflation. Economic data throughout the year will indicate whether the Trump scenario plays out as expected. The U.S. dollar has already risen substantially. We will need to monitor the impact that any large-scale stimulus has on inflation (current U.S. inflation of 1.7% remains below the Fed’s 2% target and the average rate of 3.29% from 1914 until 2016). U.S GDP growth was 1.7% in 3Q 2016, still well below the average of 3.2% experienced from 1948 until 2016.
If Trump is not successful in immediate policy change, which could disrupt the markets, the Fed has some levers to pull, specifically backing off the proposed rate hikes or modifying expectations.
External factors to keep an eye on:
Global politics & monetary policy (BOJ rate decisions and ECB asset purchases)
Uncertainty surrounding “Brexit” and its ultimate global impact
Potential trade wars as result of Trump administration policy
The 4Q 2016 negative move in bond prices is believed to now price in the expected rise in Fed Funds rate. Although we do not expect a decrease in bond prices related to the anticipated fed rate hikes, it should be noted that rising rates will impact the cost of borrowing (i.e. higher mortgage rates) as well as the savings rate (i.e. positive impact to bond and money market yields)
Global rate disparity remains (depressed and even negative international sovereign yields). This should keep U.S. Treasuries attractive to buyers of high quality bonds helping offset the pressure from rising rates.
“Someone's sitting in the shade today because someone planted a tree a long time ago.”
– Warren Buffet.
We maintain a positive fundamental view with a full understanding that the broad markets will continue to experience volatility and we anticipate a pause in the euphoric “Trump Rally.” We believe the likelihood of a near-term recession is low, supported by favorable economic data and improving corporate earnings. Economic recessions are a part of history, in fact there have been 17 recessions reported since 1920. On average these recessions have lasted roughly a year and have resulted in significant and sustainable market declines. Again, we do not anticipate a near term recession in the U.S., however, when looking back to every single recession and non-recession market correction, it is clear that “staying the course” has proven to be the most effective strategy for the long-term investor. In chart 3 below we highlight the last two recessions (2001 & 2008) and identify the market corrections and subsequent recoveries (indicated by the S&P 500 index performance). In this same chart you will notice that the recent non-recessionary corrections in 2011 and early 2016 turned out to be only temporary pauses in a bull market.
Source: Bloomberg; S&P 500 price chart (1999 – 2016)
The quote above by Warren Buffett is not one of his most famous quotes, but we thought the message was relevant to our commentary today. In every communication we talk about the importance of remaining committed to a strategically allocated and well diversified investment portfolio. While it sometimes requires extra patience and time, we believe that long term investors will be rewarded by staying disciplined. We reiterate this message again today and we look forward to meeting with you again soon to review your individual plans.
Gregory Slater, CFA, CFP®
Chief Investment Officer
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